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Is Telecom Plus Plc A Falling Knife Worth Catching? Or Should You Just Buy Vodafone Group Plc And BT Group Plc?

Shareholders in Telecom Plus (LSE: TEP) felt the heat yesterday with the company releasing some disappointing news.  In its trading update, the company admitted that it had failed to properly write down £11 million (net of the tax credit) of gas theft and leakage between 2007 and 2014, meaning that profits for the year to March 2015 were to be “significantly” below market expectations. 

The shares took a bath, finishing the day down by nearly 20%, as the market reacted to the possibility of aggressive accounting techniques being used in prior years and the possibility of further profit warnings following an uncertain outlook.  But has this fall been an overreaction, or are you best sticking with companies like Vodafone (LSE: VOD) and BT Group (LSE: BT-A) to keep the dividends rolling in?

Directors buying

The shares picked up following the initial drop as company directors spent £1,131,059 buying 141,250 shares between them at a price of just over 800 pence per share – that’s quite a vote of confidence in the business.  As we know, directors sell for all sorts of reasons – they only buy for one.

Profit Warnings Come In Threes

Whilst it’s nice to see the directors putting their hands into their pockets, I’m still cautious.  There is an old adage in the stock market: “profit warnings come in threes”. I think that the company has left the door open for another, the key paragraph being:

“Notwithstanding this anticipated improvement in our competitive position, the outlook for the new financial year is subject to more uncertainty than usual, with the overlay of political and regulatory dimensions on top of any possible impact from movements in the wholesale energy markets or fluctuations in consumer demand caused by unseasonally warm (or cold) weather.  The forthcoming general election and subsequent announcement by the CMA of its preliminary findings expected shortly thereafter will help to provide greater visibility, although as previously indicated, the unique nature of our long-term energy supply arrangements with npower should insulate us from the worst effects of any possible government imposed price freeze or regulatory intervention aimed at reducing tariffs.”

As with any regulated company, be it water, energy or financial, there is always going to be the spectre of regulatory risk.  I think this could well have been a factor that has contributed to the shares being marked down in the last 24 hours.

How Do The Shares Stack Up At These Prices?

The company helpfully gave some forward guidance of profits and the expected dividend for the year to March 2016.  Profits are expected to come in between £54-58 million with the dividend expected to grow by 15% to 46 pence per share.  Taking the mid-point of £56 million and the current share price of 785 pence per share puts the shares on a forward P/E of just over 11 and yielding nearly 6%.

Compare that to Vodafone.  Its shares currently change hands on 38 times 2015 earnings and nearly 39 times 2016 earnings.  Whilst this is supported to a degree by an above-average yield of 5%.  Turning to BT Group, these shares trade on a 2015 P/E of just under 15 times earnings, falling to just under 15 times earnings in the year to March 2016, the shares yield an above average yield of just over 3% in both years.

I think that it is wrong to write the shares off at these prices, especially when you are paying a higher multiple for larger companies that are not growing as quickly, or yielding as much as Telecom Plus. I would, however, urge caution – falling knives can fall further, and inflict very nasty cuts to your wealth.

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Dave Sullivan has no position in any 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.