Up until the beginning of July this year, Talktalk Telecom (LSE: TALK) was one of the market’s hottest growth stocks. In the three years to 2 July, Talktalk’s shares rallied 163% as the company targeted pre-tax profit growth of 370% over the short space of just three years.
However, Talktalk’s troubles began soon after its shares hit an all-time high at the beginning of July. Around a month after reaching this critical high water mark, Talktalk issued a profit warning and two months after that, the company announced that it had been the target of a sustained cyber attack. After this series of unfortunate events, Talktalk’s shares have slumped 41% from their peak.
Nonetheless, Talktalk’s management seems to be surprisingly upbeat about the company’s prospects despite the turmoil of the last six months.
Alongside the group’s first-half results, which were released after the hack attack had taken place, management stated that the company is on track to deliver full-year results in line with market expectations. The City is currently expecting the group to report a pre-tax profit of £147m and earnings per share of 12.9p for the full-year.
Unfortunately, I don’t share management’s optimistic outlook. You see, for the first-half of the year Talktalk reported a pre-tax loss of £8m, compared with a profit of £20m in the same period last year as the company’s increased by £28m. What’s more, the full fallout from the cyber attack is not yet known.
Room to disappoint
Talktalk’s costs are rising, and it’s not known how many customers decided to leave the company after the “significant and sustained” cyber attack the company suffered during October. The company itself has said that the attack will result in one-off costs of £35m. Although, management seems to believe that this one-off cost won’t affect profits for the year as a whole.
These factors lead me to conclude that Talktalk’s management is setting the company up to disappoint further down the road. It seems silly for management to state that the company is on track to meet full-year forecasts after the events of the last few months.
Moreover, Talktalk’s shares are currently trading at a forward P/E of 19.7, which doesn’t leave much room for disappointment.
A better pick
There’s no other way of putting it, Talktalk’s future is extremely uncertain and until investors receive some clarity about the long-term effects of the cyber attack, BT (LSE: BT-A) looks as if it could be a better investment.
At first glance, BT is cheaper than Talktalk. The company currently trades at a forward P/E of 15.2. Earnings per share are expected to fall by 3% this year but rebound 7% during the company’s next fiscal year.
Still, the biggest difference between BT and Talktalk is size. Unlike Talktalk, which has to spend heavily to convince customers to switch to its service, BT’s size and reputation draws customers to its offering, despite its higher price.
Overall, if you’re looking for a solid long-term investment, I’d say BT is the best choice.
