Take, for example, BT (LSE: BT-A) (NYSE: BT.US). Its focus at the present time is on expanding its product offering so as to be a provider of mobile, broadband, pay-tv and landline and, by doing so, it is hoping to increase customer numbers, sales and, ultimately, profitability. And, to BT’s credit, the investment world seems to be on board with the idea, since BT’s share price has risen by 260% in the last five years.

However, just a decade or so ago, the focus for BT was on shrinking its business so as to become more efficient and more focused on providing a niche offering. For example, it sold its mobile offering and instead focused on broadband and landline offerings, with pay-tv not being a focus. And, while that has been successful, BT is now doing the opposite and has purchased the mobile network, EE, as well as various sports rights which are eating away at its margins in the short run.

The problem with expanding quickly and offering more products in new and different spaces is that companies can quickly become inefficient. That’s not to say that BT is a poorly run business, but rather that juggling too many balls inevitably leads to higher than required costs, a lower return on investment and difficulty in outperforming the wider index in terms of profitability growth. And, with all of the initial investment required, it can cause greater risk as well as a potentially disappointing return.

That’s a key reason why stocks other than BT in the fixed line telecoms sector seem to have more appeal. For example, the likes of Cable & Wireless (LSE: CWC), Colt (LSE: COLT) and Telecom Plus (LSE: TEP) may lack the size and scale of BT, but they have far stronger growth prospects and a much clearer catalyst for future share price growth.

In fact, all three companies are expected to increase their bottom lines at double digit rates next year. In the case of Cable & Wireless and Colt, this equates to a price to earnings growth (PEG) ratios of just 0.7, which indicates that their shares are undervalued and could move significantly higher. And, while Telecom Plus has a PEG ratio of more than double that at 1.5, it is still far more appealing than BT’s PEG ratio of 2.9.

Furthermore, Cable & Wireless and Telecom Plus yield 3.9% and 4.6% respectively, which indicates that they could be better income plays than BT, which has a yield of 3.2%. And, while Colt posted a loss last year, its anticipated shift to profitability this year could be another reason for investors to bid up its share price over the medium term.

Of course, BT’s foray into quad play may prove to be a major success, but the market clearly has high expectations for the business and, with vast initial costs, a pension liability that remains a drag on performance and the risk of inefficiencies due to a greater breadth of services, Cable & Wireless, Colt and Telecom Plus hold more appeal at the present time.

The post Why I’d Sell BT Group plc And Buy Cable And Wireless Communications Plc, Colt Group SA And Telecom Plus PLC appeared first on The Twelfth Magpie.

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• Down 16% in 5 weeks, are BT shares just too good to miss?
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• With a 6.9% yield, is this one of the best UK dividend stocks to buy right now?
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Peter Stephens has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

This screen has two main parts. The first is an earnings quality assessment, which looks at ten different earnings quality factors.

These factors are based on the ten most common methods of earnings manipulation, including factors like inventory levels, cash generation and rising levels of receivables.  

The second part of the screen is a basic valuation assessment. Companies with the highest valuations but lowest earnings quality make it on to Société Générale’s naughty list.

All stocks in the FTSE World Developed and FTSE 350 indexes are included in the screen. Here are the UK companies that currently qualify. 

Look out below!

Just Eat (LSE: JE) leads the list of expensive stocks with poor quality earnings and it’s easy to see why. 

The company currently trades at an eye-watering forward P/E of 74, which looks expensive, even after factoring in projected earnings growth of 40% this year. What’s more, Just Eat looks expensive on several other metrics, including P/B, price-to-sales, and price-to-free-cash-flow. 

In fact, Just Eat is one of the most expensive companies in the technology sector, a sector that’s renowned for high valuations. 

Poor earnings quality 

Cable and Wireless (LSE: CWC) is anther stock investors should stay away from. 

Cable is currently trading at a forward P/E of 25.6, a significant premium to the telecoms sector average of 14.7. 

Moreover, Cable’s earnings history over the past few years leaves much to be desired. The company’s net profit has fallen 17% since 2010, and operating cash flow has declined by 42%.

What’s even more concerning is the fact that since 2010, Cable’s net debt has tripled. Return on capital employed has collapsed from 19% to 1% during the same period.

Resource dependant

As the world’s leading silver producer, Fresnillo’s (LSE: FRES) outlook is tied to the silver price. Unfortunately, as the price of precious metals has fallen, Fresnillo’s income has also collapsed. 

Since 2011 Fresnillo’s net income has declined by 88%. The company’s operating cash flow has followed suit and for the past two years, Fresnillo’s capital spending has exceeded cash generated from operations.

As a result, Fresnillo has been forced to borrow heavily. Since 2011 Fresnillo has gone from reporting a solid cash balance of $685m to net debt of $347m. 

Overall, Fresnillo is struggling, and the company’s forward P/E of 30.6 hardly seems appropriate. 

High dividend risk

Alongside the expensive stocks with poor earnings quality screen, Société Générale also publishes a monthly “high dividend risk“. This screen seeks to weed out those companies that are likely to cut their dividend payouts in the near future. 

EVRAZ (LSE: EVR) is just one of the five UK firms that made it onto the high dividend risk screen this month. Analysts expect the company to offer investors a dividend of 6.9p per share this year, a yield of 4.5%.

According to estimates, this payout will be covered three-and-a-half times by earnings per share. However, with net gearing of 284%, EVRAZ should be retaining cash to pay down debt, not distributing valuable profits to investors. 

So, there is a chance that the steel maker could be forced to slash its payout to preserve cash in the future.

The post Why You Should Avoid Cable and Wireless Communications Plc, Fresnillo Plc, Just Eat PLC & EVRAZ plc appeared first on The Twelfth Magpie.

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

Looking Ahead

Despite its impressive share price growth, BT continues to offer excellent value for money. For example, it trades on a price to earnings (P/E) ratio of 15.1, which is less than the FTSE 100‘s P/E ratio of around 16 and shows that there is still rerating potential over the medium term. And, with BT forecast to grow its bottom line at a faster pace than the wider index (due largely to its expected takeover of EE and the subsequent cross-selling opportunities), it could prove to be a sound investment at the present time.

Sector Peers

However, BT is clearly not perfect. It continues to have a vast pension liability, a balance sheet that is somewhat shaky (and which will likely require a rights issue if the EE deal comes off), while its price to earnings growth (PEG) ratio of 2.1 hardly makes it an enticing growth play over the next couple of years. In other words, while BT has excellent long term potential, its short term progress may be somewhat challenging.

With that in mind, it could be worth looking at some of BT’s sector peers. Notable among them is TalkTalk (LSE: TALK), which is already a quad play provider and has stunning growth prospects. For example, it is forecast to increase its bottom line by 69% next year, and by a further 38% in the year after. And, with TalkTalk having a P/E ratio of 20.1, this translates to a PEG ratio of just 0.3, which indicates that TalkTalk’s shares could move significantly higher.

In fact, it’s a similar story with three of BT’s other sector peers. For example, Telecom Plus (TEP) may have had an awful year, with its shares being down 43%, but it is expected to increase its net profit by 10% next year and 23% the year after. This puts it on a PEG ratio of just 0.5, which makes its shares rather appealing at the present time.

Furthermore, Cable & Wireless Communications (LSE: CWC) and Colt (LSE: COLT) also offer growth at a very reasonable price. For example, they have upbeat growth prospects and trade on PEG ratios of just 0.4 and 0.6 respectively – both of which are significantly more appealing than BT’s PEG ratio and make them more enticing growth stocks.

A Strong Sector

So, while BT is an attractive stock to buy at the present time, the telecoms sector has a number of other top quality growth plays that are worth considering ahead of it. Certainly, they do not offer the size, scale and stability of BT, but their share prices could turn the tables and, unlike in the last year, outperform BT moving forward.

The post Should You Buy BT Group plc Instead Of TalkTalk Telecom Group PLC, Cable And Wireless Communications Plc, Colt Group SA & Telecom Plus PLC? appeared first on The Twelfth Magpie.

More reading

• Why has the BT share price almost doubled – yet gone nowhere?
• Down 16% in 5 weeks, are BT shares just too good to miss?
• This income stock’s yielding an amazing 9.5%!
• With a 6.9% yield, is this one of the best UK dividend stocks to buy right now?
• A 7.8% forecast dividend yield! 1 income share I wish I could buy today!

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