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BT Group plc Climbs While KCOM Group PLC And Telecom Plus PLC Plunge To 52-week Lows

It used to be that smaller telecoms companies were expected to outwit their huge competitors like BT Group (LSE: BT-A) (NYSE: BT.US). But over the past 12 months the opposite has been happening, at least in terms of share prices.

Look at former growth darling Telecom Plus (LSE: TEP) for example. In the four years to the end of January 2014 the shares soared by 530%, but in the past 12 months the price has crashed back by 40% to a 52-week low today of 1,122p.

At KCOM Group (LSE: KCOM) we saw a more modest rise in the same four years to last January, but still an impressive 83%, while the FTSE managed only 30%. But again, over the past 12 months things have turned bad with the shares down 21% to a low of 78.5p. What’s gone wrong?

Beware the growth story

At Telecom Plus I think the answer is actually not much at all. In fact, we have have an expected rise in earnings per share (EPS) of 27% for the year to March 2015, after a couple of years of accelerating earnings growth. After that, however, EPS growth forecasts drop to 18% for 2016 followed by 15% for 2017.

Those are still very impressive forecasts, but once growth starts to slow at a new growth company, the share price usually suffers a fall. In this case, 2014’s results left the shares on a pretty stretching P/E of 35, but that’s down to around 18 now, dropping to 13 by 2017. With dividend yields above 4% and rising, Telecom Plus looks good, but there’s a lesson for growth investors here.

Falling revenues

How about KCOM? Well, declining revenues perhaps make it look like the Hull-based operator is not going to overtake BT after all, and with stagnant EPS shareholders must be fearing a dividend cut. There are forecast yields of 6.4%, 7% and 7.3% for this year and the next two, but declining earnings would take cover down as low as 1.2 times by 2017.

Telecoms companies need to retain cash to reinvest, and KCOM doesn’t look capable of doing that right now.

The real secret to telecoms success comes from exploiting the blurring distinction between service and content, and it’s the big guns like BT who have the financial clout to get seriously into the content pie. KCOM, for example, just wouldn’t have been in the running to secure Premier League football and launch its own channels to show it.

Bigger is better

And it wouldn’t have the means to bid for EE and get a serious foothold in the mobile phone market either.

No, when it comes to telecoms these days, bigger usually is better. And with modest but hopefully sustainable growth and P/E multiples of around 13, BT looks the best of the bunch to me.

Telecoms has had its share of ups and downs, but as part of a very simple approach to investing the sector could help you to a financially secure old age.

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Alan Oscroft has no position in any shares mentioned. The Motley Fool UK has recommended KCOM Group. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.