Wireless stocks such as BCE Inc., Rogers Communications Inc. and Telus Corp. are pricing in a greater than 50% chance that Verizon Communications Inc. enters Canada and becomes the country’s fourth major wireless operator, according to RBC Capital Markets.
As a result, analyst Drew McReynolds is recommending telecom investors shift to regional operators such as Cogeco Cable Inc., Quebecor Inc. and Manitoba Telecom Services Inc.
“Although we believe the pullback in BCE, Rogers and Telus offers a potential buying opportunity for more risk-tolerant investors, we see another leg down for the wireless stocks should Verizon enter,” Mr. McReynolds said in a research note. “As such, our bias is toward the regional operators until wireless visibility improves.”
Despite mixed second-quarter results from the Canadian telecom sector, the analyst noted Verizon’s potential entry into Canada continues to dominate the discussion.
Industry players hope that rule changes will emerge before the 700-MHz wireless spectrum auction on Sept. 17, or that the auction will be delayed to consider such changes, but their requests may be falling on deaf ears.
On Friday, Prime Minister Stephen Harper made his position quite clear, stating that “the government has a responsibility towards a wider public interest, and Canadians are very clear about what that wider public interest is to us. They want to see enhanced competition, lower prices, better services in this area.”
Mr. McReynolds also warned this major overhang for the telecom sector could remain for several years, until it becomes more clear what Verizon’s actual market impact will be.
“This somewhat asymmetric payoff unfortunately leaves us on the sidelines for the moment with respect to the Canadian wireless stocks,” he said.
The analyst noted Shaw Communications Inc. and Bell Aliant Inc. offer investors an attractive place to hide given their lack of or limited wireless exposure, but he cautioned clients about their premium valuations.
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