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

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.

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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.