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Is the Telstra share price a buy?

Is the Telstra Corporation Ltd (ASX: TLS) share price a buy?

Since the start of 2019 the Telstra share price has risen by 18%, making it one of the best-performing ASX blue chips in the ASX 20.

There is a decent chance that Telstra may have already hit rock-bottom in terms of its share price. However, its profit may not have seen the worst of it.

The recent FY19 half-year result was not exactly thrilling. As a refresher, total income declined by 4.1% to $13.8 billion, earnings before interest, tax, depreciation and amortisation (EBITDA) dropped 16.4% to $4.3 billion, net profit after tax (NPAT) dropped by 27.4% to $1.2 billion and earnings per share (EPS) declined by 27.8% to 10.4 cents.

Out of the entire telco industry Telstra in-particular is suffering from increasing competition in the mobile market and the transition of its internet customers to the NBN. Although Telstra added 239,000 retail postpaid mobile services, which saw revenue growth of 2.1%, it is suffering from declining profit margins.

As businesses like Greencross and Healthscope Ltd (ASX: HSO) have previously shown, it’s not enough to just grow your top line revenue. Increasing business size must come with a bit of profit margin growth, or else you just become a bigger target for competitors.

Telstra has a lot of competitors: Optus, Vodafone, TPG Telecom Ltd (ASX: TPM), Vocus Group Ltd (ASX: VOC) and Amaysim Australia Ltd (ASX: AYS) are some of the main ones. However, there’s plenty more like AldiMobile, Boost, Aussie Broadband and so on.

Foolish takeaway

It might get better for Telstra in the long run with data demand growing, particularly from new services like automated cars. However, in the meantime income-hungry investors may continue to experience dividend cuts as Telstra’s profit margins and the bottom line worsens.

Telstra is trading at around 15x FY19’s estimated earnings, which is not great value for a business currently in decline.

If you are looking for income then I believe these defensive ASX cash machines would be better choices.

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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. 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.

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