One of the easiest ways to judge if a share is trading cheaply or not is to look at its price/earnings ratio. This is a simple calculation by taking the share price and dividing it by the earnings per share. The lower the number the ‘cheaper’ the share is.
However, sometimes the p/e ratio can trick investors. The share market may have punished a share in anticipation of future lower earnings. The key is to find shares where the earnings are stable or preferably growing.
Here are three shares that are looking cheap:
TPG Telecom Ltd (ASX: TPM)
TPG has grown into one of the main players of the telecommunications sector in Australia. The share price has fallen considerably from a high of almost $13 in 2016 as the market came to terms with much slower growth and the troublesome NBN.
However, I think there are several reasons to be positive about TPG. It is setting up mobile networks in Australia and Singapore. It is still growing its number of broadband customers at a good rate. The government and NBN appear to want to work with telcos to make the access charges fairer.
The biggest reason to be positive about TPG is that data usage is growing at an exponential rate. Automated cars, connected homes and other devices will all be data hungry, which should be good for TPG in the future.
TPG is currently trading at 17x FY18’s estimated earnings.
Telstra Corporation Ltd (ASX: TLS)
Telstra arguably has the most to lose with the move to NBN. Previously, it owned the wires that its competitors had to pay to use. Now Telstra must pay the NBN just like every other telco.
Its mobile business is still producing strong results though, it added 218,000 domestic retail mobile customers.
Telstra has the same problems as TPG. There are a lot more competitors, profit margins are decreasing and it’s hard to see where more revenue will come from. Unlimited data plans are now common, it’s hard to charge more when you’re already giving customers unlimited data.
Telstra is currently trading at 11x FY17’s earnings. Future earnings growth is vital, otherwise the share price may keep declining. I think Telstra is trading cheaply for a reason.
Paragon Care Ltd. (ASX: PGC)
Paragon operates in the healthcare sector and has steadily acquired healthcare businesses to emerge as a leading provider of medical equipment, devices and consumables.
Some of its main customers are aged care operators, hospitals & acute care, primary care, e-health and maintenance & technology management.
Healthcare is a good sector to operate in thanks to the ageing population and defensive earnings profile.
Paragon is trading at 12x FY18’s estimated earnings with a grossed-up dividend yield of 5.36%.
I’m not convinced that Telstra’s earnings will turn around any time soon, it may not be until the 2020s when it posts growth again. But, I’m very interested in Paragon shares. It offers a good dividend yield, growth and defensive earnings.
Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Telstra Limited and TPG Telecom Limited. The Motley Fool Australia has recommended Paragon Care 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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