The Telstra Corporation Ltd (ASX: TLS) share price was dealt another blow today after the telco giant was the subject of a negative broker note out of Morgan Stanley.
In afternoon trade Telstra’s shares are down almost 0.5% to $2.76.
What was in the note?
The broker has had another look at the state of the Australian telecommunications sector and doesn’t appear overly positive on what it has seen.
According to the note, Morgan Stanley believes the outlook for the sector remains challenging due to competitive pressures. This can be seen in the downward pressure being placed on sales, margins, and investor returns in the sector.
And with things unlikely to change in the near-term, the broker is concerned that the market may be expecting too much from the telco companies between now and FY 2021.
Because of this, its analysts expect Telstra to have to cut its dividend in FY 2019 to 18 cents per share.
This has resulted in Morgan Stanley retaining its underweight rating and slashing the price target on Telstra’s shares to a lowly $2.60 from $3.00.
It also has the same price target on the shares of equal weight-rated Vocus Group Ltd (ASX: VOC).
The broker is, however, reasonably bullish on TPG Telecom Ltd (ASX: TPM).
While there will be a lot of scrutiny over the launch of its mobile offering, especially in regard to timing and budget, the broker believes it is the best option in the Australian telco sector for investors.
It has an overweight rating and slightly reduced price target of $6.70 on its shares at present. This price target implies potential upside of almost 19% excluding dividends.
Which certainly does make it a tempting investment option. However, it isn’t enough for me to part with my money just yet. I intend to wait and see how the mobile launch goes before considering an investment.
And in respect to the rest, I’m sitting out until competitive pressures ease or the NBN is written down by the government. Until then I think there are better options elsewhere on the local share market.
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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Telstra Limited, TPG Telecom Limited, and 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 Scott Phillips.