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It’s been a long road for broadband provider TalkTalk Telecom Group (LSE: TALK), whose share price has fallen by more than 70% over the last four years. But as I’ll explain, I think this unloved FTSE 250 company may finally have reached a stage where it could be a decent investment.

Why I’ve changed my mind

If you’ve read my previous coverage of TalkTalk over the last few years, you’ll know that I’ve been avoiding the stock. So what has changed?

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I think the plans set out by founder Sir Charles Dunstone when he returned to the firm in May 2017 are starting to deliver results. The main thrust of the strategy is for it to be a large-scale value provider of fixed broadband only.

Figures released today suggest that progress is steady. The company reported a net increase of 490,000 subscribers for fibre broadband. Total customer numbers rose by 150,000 to 4.3m and the firm has now seen nine consecutive quarters of growth.

Of course, it’s easy to win customers by slashing prices. So is TalkTalk becoming more profitable as well?

Rising profits

Today’s figures are mixed. Underlying revenue rose by 2.2% to £1,544m, while operating profit excluding certain one-off costs rose by 46% to £89m. Much of this gain was due to lower operating costs, which the firm says will be a continued focus.

Restructuring and network upgrades are continuing to absorb much of the firm’s spare cash. But even if we include all costs, TalkTalk moved from an operating loss of £44m to an operating profit of £47m last year.

More importantly, cash generation improved, leaving the dividend covered comfortably by free cash flow. Net debt remains a concern, at £781m. But no significant repayments are due until 2022, by which time costs should be lower and income higher.

TalkTalk shares don’t look cheap, with a 2019/20 forecast price/earnings ratio of 18 and a forecast dividend yield of 2.8%. But if earnings continue to recover, I think the current price could offer good value. If I wanted to add TalkTalk to my portfolio, I’d certainly consider buying after today’s results.

Powering up for growth?

Temporary power solutions provider Aggreko (LSE: AGK) is another firm that’s been through a long decline. This company rents out generators to provide power for large events and also operates in emerging markets, where it can provide additional grid power to meet growing demand for electricity.

The shares have fallen by about 65% since September 2012. However, Aggreko’s latest figures confirmed my view that this business is on the mend. The group’s underlying revenue rose by 8% to £1,760m while underlying pre-tax profit was 10% higher, at £182m.

I am generally cautious about companies’ underlying figures, which include adjustments designed to flatter profits. But I’m comfortable with Aggreko’s adjusted numbers. The only real changes relate to exchange rates and fuel costs, which are passed through to customers.

My calculations indicate that the firm’s operating profit margin rose from 10.8% to 12.4% last year. There were also improvements in free cash flow and underlying earnings. Analysts’ forecasts suggest modest growth in 2019 followed by bigger gains in 2020, when the company will provide power for the next Olympic Games.

The shares currently trade on 16 times 2019 forecast earnings, with a 3.4% dividend yield. I think this could be a decent entry point for long-term buyers.

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Roland Head has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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