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Is AdEPT Telecom plc the best telco stock after profits soar?

Today’s first half results from telecoms company AdEPT (LSE: ADT) show that it is making excellent progress. Sales increased by 19% to £16.5m and adjusted earnings rose by 12%. Furthermore, its long term growth potential continues to be bright. Does this mean that it is the best telecoms company around for long term investors?

AdEPT’s sales increase was largely due to the five month revenue contribution from Comms Group, following its acquisition in May. In fact, Comms contributed around 12% of the revenue increase in the first half of the year, which means that excluding its impact AdEPT’s sales increased by a more modest 7%.

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Of course, this still represents a strong performance in a highly competitive sector. AdEPT was able to enjoy considerable success in the public sector and healthcare space during the period. It won new contracts with organisations in those sectors as a result of its various framework agreements. This has seen an increase in contracts with 40 councils at the end of the interim period.

AdEPT’s transition from a traditional fixed line service provider to a complete communications integrator continues to progress in-line with expectations. Revenue from managed services including data connectivity, hardware and cloud-based contact centre solutions, rose by 53% and accounted for 53% of total revenue. Looking ahead, there is more potential for growth in this space, which could boost AdEPT’s overall financial performance.

In terms of its growth prospects, AdEPT is expected to grow its bottom line by 11% in the current year and by a further 1% next year. Beyond that, AdEPT has the potential to continue to grow as a result of its transition. AdEPT’s price-to-earnings (P/E) ratio of 11.8 indicates that it offers good value for money and a favourable risk/reward ratio.

Of course, AdEPT is a relatively small business and lacks the diversity, size and scale of other telecom and media companies such as Sky (LSE: SKY). In Sky’s case, it is also in the midst of a period of transition which will see it become a quad play operator when Sky Mobile is launched. This is likely to provide considerable cross-selling opportunities for Sky and could help to differentiate its offering versus other operators.

Although Sky trades on a higher P/E ratio than AdEPT of 13.6, it has a much lower risk profile. Not only is it better diversified, Sky has a more resilient earnings profile thanks to its operations spanning the UK, Germany and Italy. Its revenue stream is also more varied and this means that its growth outlook is arguably more stable and easier to predict than is the case for AdEPT.

As such, Sky seems to be a better buy than AdEPT at the present time based on the two companies’ risk/reward ratios. AdEPT may prove to be an excellent long term buy, but Sky offers a degree of stability in a highly competitive telecoms and media space.

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Peter Stephens 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.