Why I Would Sell BT Group plc And SKY PLC But Buy Talktalk Telecom Group PLC

Talktalk Telecom (LSE: TALK) released an upbeat set of full-year results yesterday. For the fiscal year ending March, unadjusted pre-tax profit rose by around 3% year on year to £32m while revenue ticked higher by 5% to £1.8bn.

However, these results included exceptional costs of £63m related to Talktalk’s restructuring programme, as well as the intergeneration of customer bases acquired from Virgin Media and Tesco

Excluding these costs, statutory profit after tax jumped 157.1% year on year to £72m. 

Upgrading forecasts

In addition to these upbeat full-year results, Talktalk announced that it was upgrading it compound annual revenue growth target through the financial year 2017. Management now expects the group to grow revenue by 5% per year beyond 2017. The previous forecast predicted annual growth of 4% after 2017. 

Further, Talktalk has raised its cost savings target from £50m by 2017, as originally targeted, to £70m. 

Also, as promised previously, Talktalk announced a 15% increase in its dividend payout.  

And these results, along with the company’s long-term forecast, highlight why Talktalk is a better pick than larger peers SKY (LSE: SKY) and BT (LSE: BT-A).

Competitive pressures

Both BT and Sky are facing multiple pressures.

Sky, for example, is under threat from the rise of streaming, on-demand content providers like Netflix. Not only to these providers offer an on-demand service but, for the most part, they are the cheaper alternative.

What’s more, Sky’s recent decision to pay a record-breaking £4.2bn for the rights to broadcast 126 Premier League games, has only reduced the company’s ability to compete effectively with lower cost providers.

After paying for these rights, the company is having to increase the prices of its TV packages by around 9% to maintain its current level of profitability.

With prices rising, sooner or later customers will start switching off their Sky boxes and turn to cheaper alternatives. 

A drag on earnings

BT does have a wider product offering than Sky, so the company can compete more effectively with smaller rivals. Still, the threat of regulation, the company’s towering pension deficit, and debt pile are preventing it from lowering prices to dominate the market. 

All of these pressures are proving to be a drag on earnings for these two multimedia giants.

Talktalk is facing no such pressures. Indeed, the company is growing rapidly, both organically and through bolt-on acquisitions, while its prices are some of the lowest around. Additionally, the company is still small enough to fly under the radar of regulators. 

Slow growth 

The pressures currently facing BT and Sky really shows through in analysts’ forecasts for the two companies.

For example, City analysts expect BT’s earnings per share to grow by 2.2% over the next two years, roughly 1.1% per year. Similarly, analysts believe that Sky’s earnings will grow by around 6.6% over the next two years.

These growth rates are hardly anything to get excited about, especially when you take into account BT and Sky’s lofty valuations. Specifically, BT and Sky currently trade at forward P/Es of 15.1 and 20.2 respectively. 

Cheap growth

On the other hand, Talktalk, with its smaller customer base and room to grow is set to grow rapidly over the next two years. Analysts predict that the company’s earnings per share will expand by 73% during 2016 and 42% during 2017.

Overall, analysts are predicting that Talktalk’s earnings will expand 178% over the next two years. 

But despite this projected growth, Talktalk currently trades at a relatively subdued forward P/E of 24.3 and PEG ratio of 0.3.

Top growth stock

Top growth stocks with bright prospects like Talktalk are hard to unearth. 

But if it's growth you're looking for, then have the perfect stock for you. Indeed, we believe that this company has the potential to drive a three-fold increase in sales in just five years -- that's an impressive rate of growth you'll be hard pressed to find elsewhere. 

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