On Aug. 7, a Calgary Herald headline proclaimed: “Telus at war.” Indeed, considering the vitriol company executives and the Telecommunications Workers Union have exchanged since workers in B.C. and Alberta walked off the job on July 21, the word “war” might seem apt. But you wouldn’t know of any battle raging by looking at Telus Corp.’s stock price (TSX: T). As the Burnaby-based telco entered the fourth week of its labour dispute with the TWU, which represents some 13,000 Telus employees, the stock continued to surge. As of its Aug. 11 close, $46.50, the share price was up nearly 11% since workers walked off the job, topping by 10¢ its record high, set back in July 2000. Year-to-date, Telus stock is up more than 28%.
A company’s share price often takes a hit when its employees start walking picket lines. Why not in the case of Telus? Aside from speculating how much stronger the stock might well be without the strike, there are two ways to look at it. One is that Telus’s business is so solid–especially in wireless–that the market is blind to any risks associated with the job action. The other way is to discount the union’s ability to pose much risk in the first place.
First, Telus’s business: on Aug. 5, management reported second-quarter results that beat consensus estimates. Year-over-year, revenues were up 8.2%, earnings before interest, taxes, depreciation and amortization (EBITDA) rose 10.2%, and the company earned 53¢ per share. Much of the good news was driven by its wireless division–revenues up 18.4% year-over-year, EBITDA up 28%–which made up some 40% of total revenue in the quarter, and 42% of total EBITDA.
Although wireless is hot, and a rising tide does tend to float all boats, Telus is riding especially high. Consider its rival Bell Canada Enterprises (TSX: BCE), which reported its Q2 financials Aug. 3. Its wireless division–16% of EBITDA, although Merrill Lynch estimates Bell Mobility contributes about $14 per share in value to BCE’s $30 stock price–posted a 10.5% gain in revenue over the same period last year, and had strong subscriber growth. But average revenue per user (ARPU), an important measure in wireless, was flat, and margins slipped to 43%. Telus, on the other hand, experienced rising ARPU, and margins, also up, were 49%. “Despite the fact that Telus Mobility has 23% fewer subscribers than Bell Mobility,” says Dvai Ghose, an analyst with CIBC World Markets, “they had 10% greater EBITDA on the quarter. That’s really astonishing.” And it goes a long way toward explaining why Telus’s price-to-earnings ratio is about 22, while BCE’s is 15.
Investors don’t seem all that concerned about the labour dispute. For starters, the strike, which began when management imposed a new contract after nearly five years of unsuccessful bargaining, is regional. By using call centres in Central Canada, Telus has so far been able to maintain customer support levels and prevent significant disruptions to its business. Even in the West, the dispute largely rests in British Columbia, where nearly 6,000 former BC Tel workers have the most to lose from the proposed contract. Meanwhile, little would change for the almost 5,500 Alberta employees, who were represented by a different union prior to the 1999 BC Tel merger. In fact, Telus estimates that about half of the union employees in Alberta are already crossing picket lines; the union disputes that claim.
“It’s safe to say that the market believes that Telus’s management action will eventually break the union,” says Jeffrey Fan, an analyst with UBS Securities Canada. “I think the strike will last as long as the union can last.” By his estimate, that’s six months, but Fan notes that the union claims to have secured additional funding. “That could extend them for another three months or so,” he says.
In the short term, Telus will enjoy cost savings, thanks to reduced salaries. But labour turmoil comes at a critical time for the firm, just as a new cable telephony entrant, Shaw, is targeting its stronghold markets. The bottom line? Watch for signs of investors’ impatience with the strike. The long-term flexibility and cost savings Telus would accrue with its current proposal are key for it to be competitive in all areas of its business. And that makes the strike a necessary and worthwhile war for Telus to wage, no matter how long it takes to win.