Is the Telstra Corporation Ltd (ASX: TLS) share price a buy after rising 30% in 2019?
I think one of the best phrases in response to this question is “past performance is not a reliable indicator of future performance”.
When you consider that Telstra’s net profit actually fell by 39.6% in FY19, this increase of the share price is just based off a re-rating of the multiple of earnings that the market is willing to pay. Are investors likely to pay another 30% more, or even 15% more, for the same earnings? I’d say it’s unlikely.
Actually, FY20 earnings are likely to fall (again) because revenue is expected to come in at a range of $25.3 billion to $27.3 billion (compared to $27.8 billion) and underlying earnings before interest, tax, depreciation and amortisation (EBITDA) is going to be between $7.4 billion to $7.9 billion (compared to $7.8 billion in FY19).
The main reason for the decline of profit is the NBN. In FY19 Telstra absorbed around $600 million of negative recurring EBITDA. Since FY16 Telstra estimates the NBN has hurt EBITDA by approximately $1.7 billion and estimates it is only around 50% of the way through the recurring financial impact of the NBN, suggesting that there’s another $1.7 billion to go. Ouch!
For me, one of the other main reasons I’m not particularly attracted to Telstra is because the telco reported that excluding the NBN, underlying EBITDA still declined by 4%. I appreciate that Telstra is reducing costs but the rest of the business is not generating much profit growth.
It seems that Telstra’s main hope of turning this around is 5G. The new network would hopefully allow a step-up in revenue per user for all of the new services like automated cars. Secondly, it could mean Telstra could bypass the NBN and offer 5G-powered wireless broadband at much higher profit margins.
If Telstra’s profit is going backwards then I don’t believe the share price or dividend can go upwards. There’s also a lot of low price competition from the likes of TPG Telecom Ltd (ASX: TPM) and Amaysim Australia Ltd (ASX: AYS) all trying to increase their market share.
So, although Telstra may look decent value at 17x FY20’s estimated earnings, I wouldn’t be surprised to see the earnings drop in FY21 as well, meaning it’s a higher p/e ratio for FY21.
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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.