Everyone has heard of fibre optics but too many readers have missed out on the substantial long-term profits on offer. The main telecommunication businesses building or buying fibre optic networks (though others also own fibre) are Vocus Communications Limited (ASX: VOC), Amcom Telecommunications Limited (ASX: AMM) and TPG Telecom Limited (ASX: TPM). They have all demolished the S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO) over the last two years, as the market has slowly become aware of the value of their assets.
Here’s why it’s not too late to get on board this trend:
1) Companies like Amcom, Vocus and TPG have a competitive advantage because they keep data more secure. Sure, it may cost more, but that is a relatively small expense for a big corporation with its reputation on the line. All three companies offer “dark fibre” which means you can lease one little fibre strand just for your company. In an age where massive multinationals like Ebay and Target experience data breaches, big companies want to keep their data as safe as they can. On top of that, fibre optic companies tend to depreciate their assets over 25 years. However, fibre optic cables last a lot longer than this so that is often a source of somewhat hidden value.
2) Some people think these companies are threatened by cheaper overseas competitors. Those people are wrong. Top class companies want their websites hosted in Australia. Indeed, Mortgage Choice Limited (ASX: MOC) moved its servers to Australia as soon as Amazon Web Services started here. According to a report in The Sydney Morning Herald: “Any latency on a click-through will decrease the chances of an end user following through and using the website,” he said. “If a competitor has a slightly faster and slightly snappier website, users are more likely to continue on that website.” In March 2013, an Essential Poll found that 73% of Australians supported Labor’s NBN (even if they did not support Labor). What the people want is faster internet and they will get it one way or the other.
3) Although Vocus and TPG are quite expensive these days, Amcom is quite reasonably priced. At the current price of $2.16 it is trading at 16.1 times cashflow and yielding 2.8%, fully franked.
Looking for an even better buy than Amcom? Fibre optics aren't the only growing industry, after all...
I first bought Vocus at around $1.80, and like many Motley Fool readers I had to wait a while for the 100%+ returns. With patience, you may do the same. The Motley Fool has recently reiterated a "BUY" rating on this small but ultra promising ASX company… and you can get the name and code FREE right now. Click here for your free copy of "The Motley Fool's Top Stock for 2014."
Motley Fool contributor Claude Walker (@claudedwalker) owns shares in Vocus and has an indirect interest in both TPG and Amcom so his money is where his mouth is on this one folks.