Is TalkTalk Telecom Group PLC A Better Buy Than BT Group plc & Vodafone Group plc?

Should you buy a slice of TalkTalk Telecom Group PLC (LON: TALK) over BT Group plc (LON: BT.A) and Vodafone Group plc (LON: VOD)?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Today’s third-quarter update from TalkTalk (LSE: TALK) is relatively disappointing and, as a result, the company expects full year earnings to be at the lower end of market expectations. The reasons for this are lower than expected cost savings, as well as the integration of loss-making Blinkbox, the on-demand film service, which was recently purchased from Tesco.

As a result, shares in TalkTalk are down 1.3% at the time of writing but, looking ahead, could it prove to be a better buy than rival telecoms companies, BT (LSE: BT-A) (NYSE: BT.US) and Vodafone (LSE: VOD) (NASDAQ: VOD.US)?

A Period Of Change

TalkTalk’s results show that the company is undergoing a period of significant change, with it attempting to rationalise the business and make it simpler. As a result, it has sold its base of Broadband customers whose connections are provided by BT, acquired Tesco’s broadband and voice customers (in addition to Blinkbox), signed a new multi-year deal with Telefonica for access to 4G and national roaming services, as well as undertaking a joint venture with Sky and CityFibre in York to provide superfast broadband services.

However, the planned cost savings from the rationalisation of the business are set to be lower than expected. In fact, cost savings are now due to be £10m – £15m lower than previous guidance, although TalkTalk’s top line continues to perform relatively well, being up 4.2% in its third quarter, for example. Furthermore, it is on track to continue this rate of growth over the next two years, as well as post a 25% EBITDA margin by 2017.

Looking Ahead

Clearly, the ‘quad play’ market (landline, mobile, broadband and pay-tv services combined in one package) is becoming increasingly competitive and, while TalkTalk is making progress towards offering a more developed quad play service, the progress has been slower than anticipated, as its third quarter results show.

However, TalkTalk still has supremely strong forecasts. For example, it is expected to post earnings growth of 60% in the current financial year, 69% next year, and a further 30% in financial year 2017. That’s a staggering rate of growth and means that the company’s bottom line is expected to be a whopping 3.5 times bigger in 2017 than it was in 2014.

In addition, TalkTalk offers a wide margin of safety so that even if it misses its forecasts, it should still perform relatively well. This is best evidenced by the company’s price to earnings growth (PEG) ratio of 0.3, which indicates that its shares are very good value and offer growth potential at a great price.

The Competition

While BT and Vodafone remain relatively appealing investments due to their mix of income potential, stability and long term growth potential, they are some way behind TalkTalk when it comes to near-term growth prospects.

For example, BT is expected to increase its bottom line by 5% next year and 8% the following year, while Vodafone’s earnings are set to be 4% higher next year and 21% greater the year after that. Both, while impressive, are some way behind TalkTalk’s guidance and, in addition, BT and Vodafone have much higher PEG ratios than TalkTalk at 1.6 and 1.5 respectively.

Furthermore, even when it comes to income potential, TalkTalk holds its own since it yields 4.3% versus 3% for BT and 4.8% for Vodafone. So, while today’s results from TalkTalk are disappointing, it could still be worth buying ahead of BT and Vodafone for its better mix of income, growth and value.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Peter Stephens owns shares in Tesco. The Motley Fool UK owns shares in Tesco. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »

Investing Articles

Are HSBC shares a FTSE bargain? Here’s what the charts say!

There are plenty of dirt-cheap FTSE 100 banking stocks for investors to choose from today. Our writer Royston Wild believes…

Read more »

Three signposts pointing in different directions, with 'Buy' 'Sell' and 'Hold' on
Investing Articles

Just released: Share Advisor’s latest ‘Hold’ recommendation [PREMIUM PICKS]

In our Share Advisor newsletter service, we provide buy, sell, and hold guidance for our universe of recommendations.

Read more »

Investing Articles

Investing £5 a day could help me build a second income of £329 a month!

This Fool explains how £5 a day, or one less takeaway coffee, could help her build a monthly second income…

Read more »

Smart young brown businesswoman working from home on a laptop
Investing Articles

2 FTSE income stocks investors should consider buying in April

Income stocks are a great way to build wealth. Our writer details two picks she believes investors should consider snapping…

Read more »

Investing Articles

What might the 5-year price chart tell us about BT shares?

Christopher Ruane considers what clues the long-term performance of BT shares might offer him about business performance and whether to…

Read more »