Why you should buy Amcom Telecommunications Limited before Telstra Corporation Ltd

Telstra Corporation Ltd (ASX:TLS) is a leading blue-chip with a commanding industry position, however Amcom Telecommunications Limited (ASX:AMM) may be the better bet.

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During financial year (FY) 2014, Amcom Telecommunications Limited (ASX: AMM) continued its record of posting strong results and solid growth that investors have come to expect from the mid-tier telecommunications company.

The results (recently released) showed total sales grew 8% from $157.5 million in FY 2013 to $170.1 million in FY 2014. Even more impressive was the normalised profit growth of 12.6% which saw earnings increase from $20.8 million to $23.4 million.

On a per share basis the growth rate was less impressive though with shareholders experiencing an increase of just 4.6% in earnings per share (EPS) from 8.4 cents to 8.8 cents. The dividend didn’t disappoint however, with the pay-out raised a solid 12.7% from 5.5 cents to 6.2 cents.

Telstra had a strong performance too

Interestingly, despite its enormous size, Telstra Corporation Ltd (ASX: TLS) also produced impressive full year results for FY 2014. Telstra managed to grow revenue by 6.1%, net profit by 14.6%, EPS by 14.3% and dividends by 5.4%.

The better bet

Despite Telstra’s solid results, the growth potential and investment merits of Amcom still look better primarily thanks to its smaller size and ability to capture ‘low-hanging fruit’ from Telstra. With a market capitalisation of $525 million, Amcom is a small fish in a big pond. Second-tier telco’s such as iiNet Limited (ASX: IIN), TPG Telecom Ltd (ASX: TPM) and M2 Group Ltd (ASX: MTU) all need to muscle up to compete more effectively with Telstra. This could make Amcom an attractive takeover target for one of these larger peers.

Added to this takeover potential is the growth potential. Amcom’s management is forecasting a growth rate in profit in FY 2015 similar to that of FY 2014. Despite the higher earnings multiple of Amcom’s stock, it would appear a better bet than Telstra.

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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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