Shares in Telstra Corporation Ltd (ASX: TLS) were up nicely yesterday. Widening our view the story gets even better. Telstra shares are up around 80% in the past three years alone, not including dividends.
So what's all the fuss about? Can our $67 billion telco behemoth continue to climb or is it fully valued at its current price? It's a complex and contentious question. If you ask a half-a-dozen analysts where they expect Telstra's stock to be in 12 months you'll probably get a dozen different answers.
However, a look at the important multiples paints a bleak picture of the telco's valuation at current market prices. For example, it trades on a forward P/E ratio of 16.5, PEG ratio of 3.19 and price to book ratio of 5.26!
But taking a backwards step and looking at the 'big picture' reveals some extremely promising macroeconomic tailwinds for Telstra's business. Firstly, Telstra is a safe, defensive company with an established marketplace and customer base. It generates huge cash flows and has the ability to pay generous fully franked dividends.
During a low interest rate environment, stocks such as Telstra are in high demand. With interest rates tipped by some forecasters to go lower in the near future, Telstra shares will be at the top of new investors' watchlists.
Longer term, the digital age is increasing demand for reliable wireless networks. Telstra already has the superior mobile network in Australia and recently announced a nationwide rollout of a Wi-Fi network. As a result, Telstra is in poll position to benefit from our increasing demand for networked devices (phones, televisions, household appliances etc.), machine-to-machine communication and wearable technology.
To buy, or not?
As the official interest rate drops, analysts' valuations of stocks such as Telstra, Commonwealth Bank of Australia (ASX: CBA), Rio Tinto Limited (ASX: RIO) and Woolworths Limited (ASX: WOW) increase significantly because the discount rate (aka risk weighting) applied to them reduces.
I believe if you're focused on the ultra-long term, Telstra shares have a strong upside at today's prices. However I would not be willing to pay more than $5.50 per share.