Prices for mobile phone plans in Canada have decreased by 13% since last year, putting the potential profits of Canadian telecommunications providers into question.
Wind has helped lower the price in Canada, the studies suggest. Verizon Communications Inc. (NYSE:VZ) has likely seen that strength, and wants to purchase the company now, when the price is relatively low, before it really starts to take over market share and before its potential purchase price increases alongside that dominance.
This takeover of market share, which has happened gradually over the last few years, means incumbents TELUS Corporation (USA) (NYSE:TU) and Rogers Communications Inc. (USA) (NYSE:RCI) likely feel threatened by Wind — that’s explicitly expressed by falling costs for phone plans. Be warned that about 90% of the Canadian telecommunications field is owned by Telus, Rogers or Bell.
If Verizon Communications Inc. (NYSE:VZ) does buy Wind, it will have to compete with those top 3 firms, which are estimated to have a combined 24 million subscribers, according to the Canadian Press. According to Wind, it has only about 600,000 subscribers, but that’s growing, and Verizon looks prepared to catch that momentum.
Analyst estimates don’t appear to reflect increasing competition
TELUS Corporation (USA) (NYSE:TU) is the strongest of the Canadian Big 3 according to analysts. Earnings are set to steadily increase into the future despite increased competition. Analysts don’t appear to be shaken by the threat of Wind and others that have moved in on the Canadian telecom market. The analysts’ consensus is $2.04 in EPS this year and $2.29 next year. In 2015, EPS is estimated at $2.56. The firm’s 12-month analyst price target is $35.67, and the company is now priced in the low $30-range.
But I think TELUS Corporation (USA) (NYSE:TU) has its work cut out for it if the company wants to keep control of its market share. Furthermore, analysts estimates likely don’t reflect the recent surveys that were conducted that show a 13% reduction in the cost for a cellphone plan since last year. That decrease, coupled with increased competition, will eat into profits at Telus, and that makes this a company for investors to avoid.
Analyst estimates are also off will Rogers
The picture also looks bleak for Rogers Communications Inc. (USA) (NYSE:RCI). But this time, analysts agree with me, at least for the next year they do. Consensus estimates indicate the company will experience a 1.75% decline in earnings this year. However, the following two years feature earnings increases of 7.31% and 7.33%, respectively. On a per-share basis, earnings are expected to climb from $3.36 this year to $3.61 next year and $3.87 in 2015. Morningstar ranked Rogers as the Canadian telecommunications provider with the most upside, and stated its stock price could experience a 30% increase.
But, like TELUS Corporation (USA) (NYSE:TU), the company faces a similar dog fight for customers, and that will result in a continual drop to phone plan prices. Rogers Communications Inc. (USA) (NYSE:RCI) isn’t in as much trouble as Telus, however, as in 2012 it controlled 34% of the market share, compared to 27% at Telus. Be wary, though, with Wind expected to breeze in and pick up a piece of that pie, Rogers will suffer, despite having more customers than its Canadian counterparts.
Furthermore, last year, Rogers Communications Inc. (USA) (NYSE:RCI) earned 58% of its revenue from the wireless industry. That spells trouble in the years ahead that I don’t think analysts have considered. And it isn’t reflected in the company’s current stock price. If Verizon Communications Inc. (NYSE:VZ) does purchase Wind, it won’t be long before revenue takes a nosedive.
Verizon is set to move in
While Verizon Communications Inc. (NYSE:VZ) hasn’t purchased Wind yet, the company has stated it is interested in acquiring the company. With the financial resources of Verizon, the United States’ leading mobile-phone service provider, the company could take a large chunk of market share away from Canada’s Big 3.
The median analyst price target for the next 12 months at Verizon Communications Inc. (NYSE:VZ) is $55. The company is currently priced at around $50. The majority of 33 analysts polled suggested to hold the company, and I concur. However, if the firm does make a move to acquire Wind, I would purchase shares of the stock, and sell TELUS Corporation (USA) (NYSE:TU) and Rogers Communications Inc. (USA) (NYSE:RCI) if I were holding them.
The trend indicates lower profits at Canadian telecom firms
Canadian telecommunications has long been a sector ripe with opportunity for corporations to completely take over without much consideration for anything besides profits. Low regulations and a near monopoly have allowed companies to get away with low service standards and high fees.
However, the landscape is changing rapidly, with new companies entering the market to compete with the Big 3 and regulators tightening up. The Canadian government, for example, proposed restricting phone contracts to two years. TELUS Corporation (USA) (NYSE:TU) is currently offering reduced prices and giving away merchandise if people opt for a 3-year contract. That locks many people into plans they end up hating. Furthermore, regulators are no longer allowing ridiculous charges for international roaming, which has sometimes billed individuals tens of thousands of dollars in a swift blow. Certainly, now is the time to get out of the Canadian telecommunications companies and keep an eye on Verizon Communications Inc. (NYSE:VZ), who could make an entry any day.
Phillip Woolgar has no position in any stocks mentioned. The Motley Fool recommends Rogers Communications (USA).
The article Analysts Are Wrong About Canada’s Big 3 Telecoms originally appeared on Fool.com.
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