'Wouldn't have been on my radar previously': Why WAM likes Telstra shares right now

Telstra finally has green shoots of growth.

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Key points

  • WAM founder Geoff Wilson says Telstra is a stock pick with growth
  • After years of stagnation, Telstra could see its mobile division rise
  • Wilson also thinks lower share prices in the market could present buying opportunities

The Telstra Corporation Ltd (ASX: TLS) share price is now attractive, according to fund manager Geoff Wilson from Wilson Asset Management. And the business could soon start generating growth.

Despite a big recovery since October 2020 – the Telstra share price is up around 50% since 30 October 2020 – it's still slightly lower than where it was five years ago.

The telco has been suffering from a steady shift in households moving onto the NBN. Telstra used to own the infrastructure, so it used to make a much bigger profit margin on each connection. Now it has to compete with every other telco on a level playing field.

However, with economic uncertainty rising due to higher inflation and interest rates, some investors are worried about a potential recession.

But, there is the thought that a telecommunications business could be reliable during a period of economic uncertainty.

What's attractive about Telstra shares?

Wilson explained to Livewire Markets:

After a decade of no growth in mobile – its major segment – it is seeing growth and mobile will be the last to disconnect in a recession. Mobile use is the new recession-proof. It wouldn't have been on my radar previously.

I don't know about you, but I'd agree with that – I'd keep paying for my phone data over most other things in my budget.

In the FY22 half-year result, Telstra CEO Andy Penn explained how the company had been winning in the mobile space:

Our continued focus on mobile network leadership and building value resulted in 5% post-paid handheld average revenue per user (ARPU) growth, 6.3% mobile services revenue growth and $392 million mobile earnings before interest, tax, depreciation and amortisation (EBITDA) growth.

We added 84,000 net retail post-paid mobile services including 62,000 branded with a strong contribution from enterprise. Our branded performance reinforces the benefits of our clear leadership in 5G.

Telstra may be able to increase its ARPU further as it increases prices for users by CPI inflation. Prices could see an annual review.

Lower share prices could be a good thing

Wilson's comments were about how Telstra could do well during a recession. However, he wasn't necessarily negative about the widespread lower share prices we are seeing.

He said to Livewire:

You want markets to fall because it allows you to buy fantastic companies cheaply. Find high quality franchises and buy them when they are undervalued.

How much will Telstra earnings grow in the next few years?

According to CMC markets, the telco is expected to generate 13.8 cents of earnings per share (EPS) in FY22. Then, in FY23, EPS is expected to grow to 16.7 cents per share. Finally, in FY24, Telstra is predicted to generate EPS of 18.2 cents.

Telstra share price snapshot

Since the beginning of 2022, the Telstra share price has fallen by 5%.

Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has positions in and has recommended Telstra Corporation Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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