Is the Telstra Corporation Ltd (ASX: TLS) share a price after reporting season?
The Telstra share price has gone up 1% after rival TPG Telecom Ltd (ASX: TPM) reported its FY19 result earlier today.
Shifting to the NBN is not having a good effect on the profitability on the telco sector with the share prices and Telstra and TPG much lower than they were a few years ago.
Share prices and earnings will generally head in the same direction over the longer-term and we're seeing how difficult it is for Telstra to grow its bottom line in this environment.
For Telstra the FY19 result saw a 3.6% fall in total income, a 21.7% decline of earnings before interest, tax, depreciation and amortisation (EBITDA) and net profit after tax (NPAT) dropped 39.6% to $2.1 billion. Ouch.
Earlier this week Telstra updated its FY20 guidance to say that lower NBN connections in 2020 would mean $400 million lower total income than previously thought and $100 million lower free cashflow after operating lease payments.
Backers of Telstra have pointed to the fact that management are doing everything they can to improve Telstra's position including letting go thousands of employees to reduce costs.
Cutting costs is a painful process but probably necessary. But the key problem is the unavoidable NBN issue. Profit margins are going to be lower unless the government writes down its value of the NBN and therefore the financial expectations from NBN Co which charges telcos to access the network based on the required return.
I think reducing expenses is a relatively short-term fix for the telco. For Telstra to be worth holding in a portfolio for the long-term I think we need to see that both revenue and net profit can grow, which means 5G needs to be more profitable for the telcos than 4G and create growing revenue streams – telecommunications is seen as somewhat of a commodity, with price & value being key points for customers, which can lead to a slow race to the bottom.
Foolish takeaway
Telstra is trading at 20x FY21's estimated earnings with a grossed-up dividend yield of 6.3%. I don't know which way the share price will go over the next 12 months, but it seems earnings could fall further in FY20. It can be a bit dangerous trying to catch a falling knife, I'd prefer to wait until we know more about 5G.
