Why I'd buy Vocus Group Ltd shares before Telstra Corporation Ltd

Vocus Group Ltd (ASX:VOC) looks like it could grow much faster than Telstra Corporation Ltd (ASX:TLS).

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With the beat-up of Australia's telecom sector recently, many investors have been going bargain hunting. I have been one of them, and recently ended up buying shares in Vocus Group Ltd (ASX: VOC). You can read the specific reasons why in the link above, but the purchase carries an implicit question: Why did I buy Vocus and not another well-known telco, like Telstra Corporation Ltd (ASX: TLS)?

There were four main reasons.

  • Vocus is growing faster than Telstra and can expand its market share at the expense of incumbents (like Telstra)
  • Vocus has greater ability to reinvest in itself with new projects (e.g. Australia-Singapore Cable) and ability to improve its customer service, whereas Telstra's side projects have to become very large to 'move the dial' on earnings
  • Over time Vocus should pay attractive dividends; a smaller yield than Telstra perhaps, but a small trade-off for greater growth opportunity
  • Although Vocus is not outstandingly cheap on some metrics like enterprise value to earnings before interest, tax, depreciation and amortisation (EV/EBITDA), I think today's price promises attractive upside if Vocus can work out its issues and grow earnings. I simply don't see Telstra shares doubling in the next 5-10 years, but maybe Vocus can.

Or to put it more simply, fund manager Peter Lynch once quipped that 'businesses in mature industries see clouds, while businesses in new industries see pie' ('pie' referring to market share). I'm misquoting him a bit, but when I look at Telstra I see clouds, and when I look at Vocus I see pie.

While the near term carries some uncertainty for Vocus as it works out its issues, it has an attractive portfolio of long-lived assets that could generate an attractive amount of cash for shareholders over the long term.

The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of Telstra Limited. Motley Fool contributor Sean O'Neill owns shares of Vocus Communications Limited. The Motley Fool Australia owns shares of Vocus Communications Limited. 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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