"Be greedy when others are fearful, and be fearful when others are greedy"
This famous quote from Warren Buffett is often touted as some of the best investing advice there is.
With the Telstra Corporation Ltd (ASX: TLS) share price down almost 15% in four months at the time of writing, many investors are wondering whether this adage applies to the telecom giant.
There are many reasons to like Telstra. A strong brand name and a network quality advantage have ensured Telstra remains the dominant player in the Australian telecommunications industry, being the clear market leader in fixed voice and broadband services as well as a 48% market share in mobile service subscriptions. Telstra also has an estimated 50% market share in wholesale and commercial telecommunications services. Telecom companies are also considered a 'safe haven' in times of stock market turmoil as demand for their services are relatively unaffected by changing economic conditions.
However, it seems investors have been avoiding Telstra for the last three years, with the share price falling from a high of $6.61 in February 2015 to an eight-year low of $2.62 in June of this year. It since rose back to $3.34 in August but has fallen another 15% in the last four months, this week hovering around $2.87. These movements have been heavily influenced by the attempts of rivals TPG Telecom Ltd (ASX: TPM) and Vodafone Australia to merge their operations.
The NBN has smashed an estimated $3 billion hole in Telstra's EBITDA going forward, as Telstra can no longer rely on renting its monopoly on the wholesale network to its competitors, as it had done in the past. Telstra's cherished dividend was cut in 2017 and further cuts are expected in the future. This combination has sent investors stampeding for the exit, but has this been an overreaction?
Telstra's CEO, Andy Penn has announced a cost-cutting plan of around $2.5 billion in order to adapt the company's balance sheet for the post-NBN world. Telstra's projected payout ratio falling from 95.4% in FY 2017 to an estimated 65.4% in FY 2020. Rather than concentrating on dividends, Telstra is using its cashflow to invest heavily in 5G networks, which experts are predicting will be a huge growth driver in telecommunications over the next decade.
Foolish Takeaway
With a P/E ratio of 9.57, I believe Telstra's share price is undervalued considering its long-term growth opportunities and its significant competitive advantage in the industry. The company's vast portfolio of infrastructure and its market dominance make it an attractive stock for any balanced portfolio.
