iiNet Limited, M2 Group Ltd, TPG Telecom Ltd: which emerging telco stock should you buy?

When it comes to a solid growth sector, arguably it doesn’t come much better than the telecommunications (telco) sector. The increasingly mobile and data hungry Australian population appears to be enamoured with having both more devices and using them more often. This scenario is great for a number of emerging telco companies which provide a range of services both to individual and corporate clients. While the tailwind has also been good for Telstra Corporation Ltd (ASX: TLS), given their smaller sizes, the relative growth opportunities of second tier telcos would appear to be significantly more appealing.

Three of the top emerging players in this space are iiNet Limited (ASX: IIN), M2 Group Ltd (ASX: MTU) and TPG Telecom Ltd (ASX: TPM). While all three have good outlooks, the current pricing of each makes M2 a far more appealing investment candidate than the other two at present.

iiNet is forecast (according to data provided by Morningstar) to grow its earnings by 9.8% and 9.3% respectively in financial years (FY) 2014 and 2015. On these forecasts iiNet will earn 45.1 cents per share (cps) in FY 2015; this placed the stock on a forward price-to-earnings ratio of 15.5.

Meanwhile TPG is forecast to grow earnings at a rapid 19.8% and 15.8% over the next two years. These growth rates are excellent however it would appear to be fully reflected in TPG’s share price with the stock trading on a PE of 22.3, assuming TPG earns 26.1 cps in FY 2015.

In comparison, M2’s management has provided guidance for EPS of between 34 cps and 39 cps in FY 2014. Assuming consensus earnings growth of 14.5% is achieved in FY 2015, then M2 can be expected to earn 41.8 cps (at the mid-point) in FY 2015, implying a very appealing forward PE of 13.3.

Foolish takeaway

With the recent acquisitions of Primus, Dodo and Eftel, M2’s business has expanded significantly and the telco now offers a broad spectrum of telco services including fixed voice, data, mobile, hosted voice and cloud. With a solid outlook for growth and with the stock trading on a very reasonable multiple considering its growth rate, M2 looks to be the most appealing of these three emerging telco companies.

The top ASX pick you've never heard of...

Top Motley Fool analysts just identified their #1 ASX pick for 2014, a small-cap stock that could be poised for big gains (and offers a fat, fully franked dividend!). Discover all the details now, including the name and code, in this FREE investment report, "The Motley Fool's Top Stock for 2014."

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

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss a very important event! Chief Investment Advisor Scott Phillips and his team at Motley Fool Share Advisor are about to reveal their latest official stock recommendation. The premium “buy alert” will be unveiled to members and you can be among the first to act on the tip.

Don’t let this opportunity pass you by – this is your chance to get in early!

Simply enter your email now to find out how you can get instant access.

By clicking this button, you agree to our Terms of Service and Privacy Policy. We will use your email address only to keep you informed about updates to our website and about other products and services we think might interest you. You can unsubscribe from Take Stock at anytime. Please refer to our Financial Services Guide (FSG) for more information.