iiNet, M2, TPG: Time to look past Telstra?

Telstra’s growth outlook may make the company less appealing than its smaller competitors.

The stock market has been getting the jitters recently. This can create great buying opportunities for long-term, calm investors as it offers up shares in good companies at appealing prices. The smaller companies in the telecommunication services sector are a case in point.

In the last five trading days while nothing has fundamentally changed in the outlook for their business potential or earnings potential,  iiNet (ASX: IIN), M2 Telecommunications (ASX: MTU) and TPG Telecom (ASX: TPM) have all seen their share prices fall between 7% and 14%. In comparison, over the same period Telstra (ASX: TLS) has dropped 5%, while the S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO) has declined 3.7%.

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Source: Google Finance

So what does this mean for investors?

When markets get the wobbles and the share prices in good companies drop, it’s worth investors asking themselves a few questions.

Firstly, has anything fundamentally changed the outlook for these telco companies? No, would appear to be the answer in this instance.

Secondly, is the price fall excessive or were the shares perhaps overpriced to begin with? On broker consensus numbers for financial year 2014 (FY14) it does look like TPG is fully valued, trading on a price-to-earnings (PE) multiple of about 18 times, so perhaps TPG’s price fall is understandable. The falls in iiNet and M2 Telecommunications are less understandable. They are both trading on FY14 PE ratios of about 13 times, which looks appealing and worthy of further research by interested Fools.

Foolish takeaway

While Telstra offers a dependable dividend yield, its revenue growth outlook is less appealing. In contrast, the smaller, niche telco companies have potentially exciting growth profiles.

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Motley Fool contributor Tim McArthur does not own shares in any of the companies mentioned in this article.

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