TPG Telecom Ltd (ASX: TPM) shares stack up well to this effective share market investing test.
Investing: Simple & Easy?
Investing successfully is simple but it's not always easy. To do so, you need to follow a simple process that has stood the test of time.
Here are four ways to evaluate any company and yourself.
You must be capable of understanding the business
You should only ever buy shares of companies that you are capable of understanding.
TPG Telecom is Australia's second largest public telecommunications company, with commanding stakes in the home phone and broadband markets. Thanks to a large acquisition, it also owns iiNet.
TPG Telecom is pushing into the Australian mobile market, with the launch of a 5G network. In addition, it is expanding its fibre networks in densely populated areas, such as in and around Australia's capital cities. Finally, its expansion into the Singaporean mobile market is another promising development.
A business must have a durable competitive advantage
A competitive advantage is something that enables a company to earn wider profit margins than its peers. To be durable means the advantage must last the test of time and withstand intense competition. Brands, low costs and scale could be the source of a company's competitive advantage.
Although TPG Telecom can offer extremely low-cost telecommunications products, I think its competitive advantage is somewhat vulnerable. Its fibre networks, for example, may be regulated. And Telstra Corporation Ltd (ASX: TLS) has the most scalable mobile network.
I think TPG Telecom has a competitive advantage, likely to last many years, but it may not be durable in perpetuity.
Management must have integrity and talent
TPG Telecom has a great management team led by Chairman and major shareholder David Teoh. With other large and strategic shareholders, TPG Telecom is run more like a private business (i.e. for the long term), which I like.
No business is worth an infinite price
TPG Telecom shares have performed exceptionally well and — until last year — its shares had a valuation to match.
A recent sell off has resulted in the valuation of TPG Telecom shares becoming much more reasonable. It currently offers a 2.8% dividend and its shares trade at a price-earnings ratio of 13 times. That's pretty cheap for a company that has compounded its profits per share at 37% over 10 years.
Foolish Takeaway
If this checklist looks familiar it's because it is the same one used by Warren Buffett and Charlie Munger.
In summary, while TPG Telecom may lack a durable competitive advantage, I think the current price is very compelling for a high quality business.
