There are many cheap stocks available for the Foolish investor who is willing to look. Take telecommunications giant Telstra Group Ltd (ASX: TLS), for example. Its shares have taken a hit in 2024 and now trade at $3.55 per share, down from a 52-week high of $4.42 on 21 June 2023.
This decline could present a potential buying opportunity for savvy investors looking for a cheap stock with strong fundamentals. Let's dig into why Telstra might be a bargain worth considering.
Why is Telstra's stock cheap now?
Over the past year, Telstra shares have fallen around 18%, underperforming the S&P/ASX 200 Index (ASX: XJO) by 28%. This isn't what makes it a cheap stock, though.
The slump has pushed Telstra's price-to-earnings (P/E) ratio down to 19.7 at the time of publication. Notably, the stock hasn't traded at this valuation since 2017, when it ended the year on a P/E of 13.4.
For context, the current multiple implies that investors are paying $19.70 for every $1 of the company's earnings.
This is also a significant drop from its peak P/E of 27 in 2022 and a 16% discount from the three-year average multiple of 23.5 times. This is calculated as the average of the P/E multiples recorded at year-end.
This suggests that the current P/E ratio is on the lower end of its three-year range, making it potentially cheap.
| Year | P/E multiple (year-end) |
| 2020 | 21.5 |
| 2021 | 23.1 |
| 2022 | 25.75 |
| Average Current | 23.5 19.7 |
Allan Gray's investment chief, Simon Mawhinney, echoes this sentiment. Allan Gray first bought Telstra shares in the first quarter of this year, The Australian Financial Review reports.
Mawhinney believes this is one of the rare occasions in the past decade when Telstra is available at a "not unreasonable price", thanks to its recent decline.
Do analysts think Telstra is a cheap stock?
Goldman Sachs analysts see substantial income potential in Telstra shares, even amid recent disappointments in its trading updates.
The broker has projected fully franked dividends of 18 cents per share for FY 2024 and 18.5 cents per share for FY 2025, according to my colleague James. At the current share price of $3.55, these projections translate to forward dividend yields of approximately 51% and 5.2% for FY 2024 and FY 2025, respectively.
Goldman Sachs maintains a buy rating on the company with a price target of $4.25 per share.
Auburn Capital also rates the telco giant a buy amid the continued downtrend in its share price. According to my Foolish colleague Tristan, the broker values Telstra even higher at $4.50 per share.
On a trailing earnings per share (EPS) of 17.6 cents per share, this valuation implies a P/E of 25.5 times ($4.50 / 0.176 = 25.5) – equal to a 30% value gap at the time of writing. In my opinion, that makes Telstra a cheap stock today.
Can Telstra trade higher?
The market's reaction to the news Telstra will cut up to 2.800 jobs in April fanned the flames that were already charring the telco's share price.
Representing almost 10% of the company's staff headcount, the job cuts are part of a wider strategic review at the company.
In April, Telstra announced a review of its health division, not ruling out a potential sale of the unit. Before that, in 2021, the firm had revealed plans to cut $500 million in costs by 2025.
Known as its "T25 cost reduction ambition", the blueprints include a planned $200–$250 million in annual restructuring costs over the next two years.
The job cuts and other strategic moves would reduce costs by $350 million in the coming two years, the company recently said.
It noted:
In addition to starting the reset of Telstra Enterprise, Telstra will reshape some of its internal operations by moving its Global Business Services function into other parts of the business.
This will help simplify processes and empower leaders closest to customers to make more decisions.
Telstra's efforts in cleaning up the business can't be ignored, in my view and could be grounds for a change in P/E multiple.
Foolish takeaway
Despite a challenging year, I think Telstra's current valuation and projected dividend yield could present a compelling case.
Trading at a trailing P/E of 19.7, Telstra's valuation is compressed compared to its historical averages. It is a cheap stock compared to years past.
Just remember, investing comes with risk. Always conduct your due diligence and consider your own personal financial circumstances.
