The telecommunications industry has taken a bit of a beating over the last 6 months since its 2016 highs. Telstra Corporation Ltd (ASX: TLS) is down 10%, Vocus Communications Limited (ASX: VOC) is down 52% and TPG Telecom Ltd (ASX: TPM) is down 44%.
Warren Buffett made the analogy that if we are long term buyers of hamburgers, then we want the prices of hamburgers to be low (unless we are cattle farmers), so now might be the right time to invest in the industry.
The underlying business will perform as it does regardless of where the share price goes. The issue to consider is whether the telecommunications industry has now essentially grown as much as it can. There isn't much consolidating left that can be done, as there isn't another iiNet that TPG can takeover, or another M2 that Vocus can merge with.
If there are no growth prospects, then perhaps the share price declines are completely justified and today's prices are the new 'normal'. Here's a small snapshot of what I think about each business:
Telstra
Telstra is the giant of the industry at $62 billion in size. It's the dominant player in every telecommunications category but it's key market is mobile users. This market generated $10.4 billion of revenue and there's no sign of it losing significant market share, even after several network outages in 2016.
Telstra has now planned to spend an additional $3 billion on capital expenditure of which some is for upgrading the network to make sure those issues don't happen again. This is a long term positive for customers, but a short term negative to Telstra because of the hit to earnings.
The NBN money will be a huge boost to Telstra, but not as much as some are thinking. The NBN is meant to compensate Telstra for the loss of its monopoly on its fixed line business, which was very profitable.
Telstra had an aspirational goal to earn a lot more revenue from overseas in future years, but so far there hasn't been much activity on this front.
It has been one of the most generous dividend payers on the ASX over the last 10 years, but some might say its 98% payout ratio is harming the long term future of Telstra.
Telstra is trading at 15.6x FY17's estimated earnings with a grossed up dividend yield of 8.4%. I think around $5 is a pretty good price to buy at.
Vocus Communications
Vocus has rapidly grown through acquisitions and mergers, perhaps too rapidly. It was only just finishing its deal with Amcom when it decided to merge with M2 as well.
It can take a while to integrate management and business practices, so it's no wonder to me that the Vocus share price has been on a rollercoaster over the last 24 months.
In my opinion, a main strength of Vocus is also a weakness. The amount of different brands and businesses it now owns means it has a lot of avenues for growth, but it also means it can't focus on one or two easily without neglecting the rest.
Vocus is trading at 22.6x FY16's earnings with a grossed up dividend of 5.88%.
TPG Telecom
TPG, as mentioned above, has grown strongly through acquisitions and organic growth.
It's managed to take market share from competitors with lower cost options and the NBN provides further opportunity to do this as every provider will be working from the same infrastructure.
There aren't many rivals that TPG can acquire in the broadband space now, so it will have to grow in other ways. TPG could decide to move into the mobile market in Australia. It's also just won a spectrum auction in Singapore which could be quite profitable in future years.
TPG is trading at 16.4x FY17's estimated earnings with a grossed up dividend yield of 2.86%.
Foolish takeaway
The telecommunications industry has fallen on tough times, but now seems like a good time to pick up all three companies at beaten down prices. They may not grow much in the medium term, but from these prices they could offer good defensive qualities.
If these telecommunication blue chips don't interest you, then you should look at these blue chips instead.
