Is this telecoms stock a better buy than BT Group plc after today’s results?

Should you avoid BT Group plc (LON: BT.A) and instead buy this smaller peer?

| 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.

Fibre optic infrastructure operator CityFibre (LSE: CITY) has released an upbeat set of interim results. But do they mean now is a good time to buy it and is it a superior buy to telecoms peer BT (LSE: BT-A)?

CityFibre’s turnover increased by 147% versus the same period of last year. Alongside a stable gross margin of 86% this caused the company’s EBITDA (earnings before interest, tax, depreciation and amortisation) to move from a £1.8m loss in the first six months of last year to a £0.4m profit this time round.

New contracts with an initial value of £53.8m were added in the first part of the current year. This is a major improvement on the £23.2m for the full 2015 financial year, as well as being 6.6 times more than the comparable figure of £8.1m from last year. CityFibre’s £90m acquisition of KCOM’s 2,200km national duct and fibre assets could prove to be transformational and deliver further rises in profitability over the medium-to-long term.

CityFibre has also announced the acquisition of 137km of fibre network assets from Redcentric for £5m today. This is backed by a £4.5m revenue commitment under a 10-year leaseback agreement. The deal adds 188 customer connections to the CityFibre estate and could positively catalyse the company’s earnings in future.

Clearly, it’s a rapidly growing business but is yet to deliver a black bottom line. It’s forecast to remain in the red in the current year and the next one. Despite this, it has significant long-term growth potential and could be worth buying for less risk-averse investors.

Great potential

However, with the outlook for the UK economy and for the stock market being uncertain, buying a highly profitable company such as BT could be a better idea. BT offers less risk and upbeat potential returns thanks to its strategy of moving into the quad-play (mobile, broadband, landline and pay-TV) market. This could provide strong long-term growth prospects for the company.

Although BT is expected to record a fall in earnings of 11% this year, it’s due to return to positive growth next year. Its bottom line is forecast to rise by 8% in 2016 and with its shares trading on a price-to-earnings (P/E) ratio of 13.1, it offers upside potential. In fact, BT’s price-to-earnings growth (PEG) ratio of 1.6 shows that it offers upbeat growth at a reasonable price.

Certainly, BT’s strategy is an aggressive one. The integration of EE into the business and its investment in sports rights means that it faces additional risk in the short term. However, with a growing customer base and cross-selling opportunities, BT should be able to power into the quad-play space. This could lead to strong growth that makes its risk/reward ratio superior to that of CityFibre at the present time.

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 has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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

The market is wrong about this FTSE 250 stock. I’m buying it in April

Stephen Wright thinks investors should look past a 49% decline in earnings per share and consider investing in a FTSE…

Read more »

Black father and two young daughters dancing at home
Investing Articles

1 FTSE 250 stock I own, and 1 I’d love to buy

Our writer explains why she’s eyeing up this FTSE 250 growth phenomenon, and may buy more shares in this property…

Read more »

View of Tower Bridge in Autumn
Investing Articles

The FTSE 100 is closing in on 8,000 points! Here’s what I’m buying before it’s too late!

As the FTSE 100 keeps gaining momentum, this Fool is on the lookout for bargains. Here's one stock he'd willingly…

Read more »

Investing Articles

3 ideas to help investors aim for a million-pound Stocks & Shares ISA

The UK has a growing number of Stocks and Shares ISA millionaires, and this plan may be one of the…

Read more »

Illustration of flames over a black background
Investing Articles

2 red-hot UK growth stocks to consider buying in April

These two growth stocks are performing well, but can they continue to deliver for investors through 2024 and beyond?

Read more »

Charticle

Is JD Sports Fashion one of the FTSE 100’s best value stocks? Here’s what the charts say!

The JD Sports Fashion share price remains a wild ride during the first quarter. Could it be one of the…

Read more »

Investing Articles

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »