Whilst internet service provider TPG Telecom (ASX: TPM) has delivered outstanding returns to investors over the last two years, there comes a time when investors need to ask themselves if a stock has become overpriced.
In the last month alone, TPG shares have rallied over 22% to $4.38, taking its market capitalisation to $3.45 billion. Whilst a strong earnings report (including a 64% increase in net profit after tax (NPAT), 9% increase in revenue and a 63% increase in diluted EPS and a heavily reduced level of debt) certainly contributed to this price hike, the key trigger was the introduction of a plan to deliver NBN-like internet speeds to half a million apartments spread over five capital cities.
Under the fibre-to-the-basement (FBBT) plan, TPG would be able to own every step of the broadband supply chain to provide customers with the service, without having to pay the likes of Telstra (ASX: TLS) or NBN Co a fee for using their copper or fibre services.
However, it could face limitations based on legislation introduced by the Labor government that was designed to restrict competition from threatening NBN Co. TPG could potentially sidestep this legislation, given that it purchased its fibre network in 2010 and the regulation restricts use of those networks purchased after 2011, but that will likely open the door for other parties to rain on their parade. For instance, Telstra, Singapore Telecommunications’ (ASX: SGT) Optus and iiNet (ASX: IIN) also own enough fibre networks to follow the same strategy if TPG were successful.
There’s no doubting that TPG is a quality company, but it seems that it is now priced for the best possible outcome. Nick Harris, an analyst for RBS Morgans, said “We see TPG as now priced for success (but) this seems very optimistic. We see a high likelihood of disappointment as the facts start to solidify.”
Going forward, it seems that TPG’s share price could largely rely on the success of the plan. Alternatively, both M2 Telecommunications (ASX: MTU) and Telstra are still sitting at prices that could deliver investors excellent returns in the long run. M2, for instance, is currently trading at a P/E ratio of 18 and boasts a market capitalisation of $1.07 billion. Based on its acquisitions in recent years, M2’s potential is looking outstanding and poses as a more attractive prospect.
Not so keen on calling on a telco as an addition to your portfolio? Instead, are you interested in our #1 dividend-paying stock? Discover The Motley Fool’s favourite income idea for 2013-2014 in our brand-new, FREE research report, including a full investment analysis! Simply click here for your FREE copy of “The Motley Fool’s Top Dividend Stock for 2013-2014.”
- 3 stocks to diversify your portfolio
- Should you board the Sealink IPO?
- Are these 5 stocks too cheap to ignore?
- Yahoo! can finally put Microsoft to rest
Motley Fool contributor Ryan Newman does not own shares in any of the companies mentioned.