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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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.

Reaction

Colt was swift to announce that its independent directors “have appointed Barclays Bank acting through its investment bank as independent financial adviser“, and they believe that the offer undervalues the company and its prospects.

“Accordingly the independent directors, having been so advised by Barclays, consider that the financial terms of the offer are not fair to the independent shareholders of Colt,” it said, noting that the board believes that the financial terms of the offer may be considered by some shareholders “to be acceptable in the circumstances, and accordingly make no recommendation to shareholders whether or not to accept the offer“.

This simply means ‘raise the offer, and we’ll recommend it’. But just how likely it that?

A New Offer? 

“Under the terms of the offer, Colt shareholders will be entitled to receive 190 pence in cash for each Colt share held. This price will not be increased“, Fidelity stated, adding that the offer values the entire issued and to be issued share capital of Colt at about £1.7bn. 

There are two options now: the deal gets done on these favourable terms, as it seems likely, and shareholders will accept 190p a share — which is in line with Colt’s pre-crisis highs — or shareholders may feel entitled to ask more on the back of Colt’s new business plan, which aims to significantly improve its financial performance, as Colt reiterated today. 

190p A Share Is Fair Value

Colt trades at 190p a share, which suggests that this is a done deal.

The premium “is 21.3% to the closing price per Colt share of 157 pence on 18 June 2015,” but stands at 34.4% and 28.6% for last 12 and three months, respectively. 

On the back of flat revenues,, earnings before interest, tax, depreciation and amortisation (Ebitda) have dropped by 10% over the last three years.

Say, for the sake of argument, that Colt has now turned the corner. 

Then, assuming constant trading multiples into 2018, and a steady 10% growth of rate for Ebitda over the period, it would take about a couple of years for Colt stock to rise to 190p a share, but there are obvious risks if shareholders decided to stay put. 

Colt’s unaudited first-quarter results released on 29 May showed declining revenues, steady Ebitda, and improving free cash flow, among other things. Its core businesses, network services and voice services, are showing encouraging trends, and management is confident it “will deliver modestly positive cash flows for full year 2015“.

I doubt that’s enough to ignore Fidelity right now, however. 

The post Colt Group SA Surges Over 20% On Fidelity’s Offer — Time To Buy Or Sell? appeared first on The Twelfth Magpie.

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Alessandro Pasetti 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.