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Is the TPG Telecom share price a bargain?

The TPG Telecom Ltd (ASX: TPM) share price has dropped more than 11% in the past three months to trade around $9.45, compared to just a 4% fall in the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO).

This may be just the opportunity Foolish investors are looking for.

TPG Telecom is one of Australia’s largest telecommunications companies – recently acquiring rival iiNet – and overtaking Optus as Australia’s second-largest fixed broadband provider behind Telstra Corporation Ltd (ASX: TPM).

The telco has had a stellar seven years, with earnings, net profit, earnings per share, operating cash flow (pre-tax) and dividends all growing strongly since 2009. No wonder the share price has zoomed from below $2 in 2009 to near $10 today, and so far, that growth appears likely to continue.

Earnings per share (EPS) rose 31% last financial year to 28.2 cents compared to the previous year, and analysts have pencilled in 40 cents in earnings for this financial year. That’s growth of more than 40%, partly as a result of a full 12 months of the iiNet business but also a new contract with Vodafone to roll out dark fibre to more than 3,000 Vodafone cell sites and ongoing organic growth in new subscribers and higher revenues per subscriber.

While the competition watchdog has virtually ruled out further consolidation among the large telco players, there are still plenty of targets for TPG Telecom to consider.

TPG owns 7.9% of Vocus Communications Ltd (ASX: VOC) and also owns 13.6% of up and coming IT security company Covata Ltd (ASX: CVT). Vocus is currently in the process of merging with TPG rival M2 Group Ltd (ASX: MTU).

But TPG could also consider other telecommunications providers including satellite company Speedcast International Ltd (ASX: SDA), voice communications company MNF Group Ltd (ASX: MNF), ex-My Net Fone, and even microwave broadband provider BigAir Group Limited (ASX: BGL).

Foolish takeaway

If TPG can reach that 40 cents EPS target, shares would be trading on a P/E ratio of 23.2x at the current price of $9.45. that appears cheap for a company generating strong organic and acquisitive growth, with huge tailwinds in the sector behind it. Investors may want to add TPG Telecom to their watchlists.

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Motley Fool writer/analyst Mike King owns shares in TPG Telecom, Vocus, M2 Group and Telstra. You can follow Mike on Twitter @TMFKinga

Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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