Tighter regulations, intense price competition, and a slowdown in new subscribers made telecom the worst-performing sector of the Toronto Stock Exchange. Stocks of three telecom giants — Rogers Communications, BCE (TSX:BCE), and Telus (TSX:T) — fell 10% in December. The two-and-a-half-year downturn just got worse, sending the already beaten-down stocks near their multi-year lows. Some analysts even changed their stance on telecom stocks to bearish. However, I am still bullish on the telcos. It is an opportunity to buy undervalued assets with strong potential for long-term gains.

Why is the telecom sector underperforming?

The strength of the Canadian telecom sector was its oligopoly, where the above three telcos commanded more than 80% market share and never competed on price. However, this balance was disturbed when Rogers acquired the fourth-largest telco, Shaw Communications. To secure regulatory approval for the deal, Roger sold Freedom Mobile to Quebecor's Videotron. This parallel deal created a new national telco.

BCE and Telus used this transition time to poach Shaw's customers and strengthen their market share. Hence, the two entered into a price war, which hurt their profit margins. Among the three telcos, BCE took the biggest hit while Telus grabbed most of the market share.

All this power shift came at a time when the telcos had invested billions of dollars in a 5G fibre network. And decade-high interest rates made their debt unmanageable, forcing the two into restructuring. However, the two telcos have left the price war behind and are now focused on deleveraging.

This telecom stock is at a 14-year low

BCE's stock has slipped to its 14-year low and is trading at 2.18 times its book value. The book value tells you the amount per share after adding the years of accumulated profit. It won't be right to look at the price-to-earnings ratio in the current scenario, as its 2024 earnings are affected by several one-off items due to restructuring. In layman's terms, this is spring cleaning for BCE, and the house is a mess. The right time to judge the beauty of the house is after the cleaning is complete.

BCE reported a net loss of $1.24 billion in the third quarter as it impaired its media assets. At the same time, it acquired Ziply Fibre, which will be funded by the proceeds from the sale of Maple Lead and Northwestel. Investors did not take this news well as the proceeds were earlier going to be used to reduce debt.

Moreover, BCE revised its 2024 guidance from flat revenue growth to a 1.5% decline in revenue due to a decline in mobile device sales. Device sales make up only 11% of BCE's revenue. Its major source of revenue is from subscriptions, and they are growing. Investors seem to have overreacted to the third-quarter earnings, as the stock price has fallen 25% since then.

The overreaction comes as BCE paused its dividend growth and maintained the 2025 dividend per share at $3.99. Earlier, the payout ratio was 111% in 2023, and estimates suggest the ratio for 2024 to be above 130%, which increases the risk of a dividend cut.

Why is BCE stock a screaming buy in December

The worst is behind BCE. 2025 could see the benefits of restructuring and improved earnings due to a weak base year (2024). Moreover, rate cuts will help BCE restructure its debt and reduce its interest costs. It could also see an increase in revenue as the new telco-to-techno company focuses on fast-growing segments of cloud, digital media, and cyber security.

Morningstar estimates BCE's fair market value as $56, a 66% premium from its current trading price of $33.6.

Why is Telus stock a screaming buy in December?

Telus managed to capture a significant market share from Shaw. Unlike BCE, Telus is better positioned to handle debt. Its dividend-payout ratio is also below 90%, giving it room to sustain the 7% dividend growth. The company will gradually reduce its debt and bring it to its target levels.

Telus's profits will also improve as the price war has finally come to an end.

The Canadian telecom market has set a new balance, and Telus and BCE will be key beneficiaries.