Beyond Telstra: Mid-cap telcos worth a second look

This is a great time to consider mid-tier telco stocks.

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While Telstra Corp (ASX: TLS) is the elephant of the telecommunications sector and rightly gets a fair share of investor attention, the second tier telecom providers are, on the whole, a profitable bunch and worth following too. With over half of the mid-cap telco sector having reported their interim results, a quick review seems in order.

Amcom Telecommunications (ASX: AMM) has once again reported impressive revenue and earnings growth, with revenue up 43% and earnings per share (EPS) before significant items up 17%. Its outlook was equally upbeat, with guidance of 20% growth in earnings for the full year maintained and a new agreement with technology giant Cisco expected to help boost growth post-2013.

BigAir (ASX: BGL) boasts Australia’s largest fixed wireless broadband network, with coverage over all capital cities and a further 15 major regional centres on the east coast. The market wasn’t enthusiastic about BigAir’s results, with the shares being sold down despite reporting a 36% increase in revenues and a 15% increase in underlying net profit after tax.

iinet Ltd (ASX: IIN) with a market capitalisation of nearly $800 million and a focus on retail phone and broadband customers, has impressed with ‘another’ set of record results. Revenue grew 30%, EPS ballooned 106% and the board raised the dividend by 33%.

Macquarie Telecom (ASX: MAQ) focuses on corporate and government clients. Management explained the 33% drop in EPS as the result of increased capital expenditure to expand its data centres, service Federal Government contracts and expand cloud computing infrastructure. This explanation, while reasonable, will not make shareholders any more comfortable with the four halves in a row of declining revenue, which suggests significant competitive issues facing Macquarie Telecom.

Foolish takeaway

There are two particularly enticing aspects to investing in mid-cap telcos. One is that today’s mid-sized companies could be tomorrow’s large companies. Secondly, (and perhaps more importantly) the businesses, due to their size and nimbleness have the ability to cherry pick clients from the large players through both service and pricing, allowing them to carve out profitable niches.

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The Motley Fool’s purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead.  This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. Motley Fool writer/analyst Tim McArthur does not own shares in any of the companies mentioned in this article.

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