The Fastest-Growing Telecom Stocks

Why are investors willing to pay only 10 times earnings for some stocks, but 20, 50, even 100 times earnings for others?

The short answer: growth. Companies that can grow their earnings meaningfully could make lofty current P/E ratios look cheap in hindsight.

Of course, any company can promise a rosy, growth-rich future. Figuring out which companies can actually deliver is far trickier. In this series, I take the first step by identifying companies that have put up the best growth track records in their respective sectors.

Below, I've listed the top sales growers in diversified telecommunications services over the last five years. Here's how to interpret each data column.

  • Five-year sales growth: I rank each company's sales growth, to capture its pure trailing expansion without regard to the vagaries of earnings.
  • Five-year EPS growth: Since sales growth means nothing if it doesn't ultimately fall to the bottom line, I've also included each company's five-year trailing EPS growth rate.
  • Five-year analyst estimates: This column shows us how much EPS growth analysts expect over the next five years. Just keep in mind that analysts tend to grossly overestimate a company's prospects.
  • Five-year ROIC range: Return on invested capital basically shows you how efficiently a company is converting its debt and equity into profits. We want companies that can do a lot with a little. By looking at the five-year range, we can start to gauge both the power and the consistency of a company's profit engine.

Company

5-Year Sales Growth

5-Year EPS Growth

5-Year Analyst Estimates

5-Year ROIC Range

Internet Gold Golden Lines (Nasdaq: IGLD  )

103.0%

NM

N/A

5.2% / 7.2%

Atlantic Tele-Network (Nasdaq: ATNI  )

43.5%

(4.8%)

N/A

3.9% / 15.6%

CenturyLink (NYSE: CTL  )

30.8%

(7.8%)

2.4%

4.7% / 13%

Frontier Communications (NYSE: FTR  )

21.7%

(26.1%)

(1.4%)

6.9% / 8.3%

Nortel Inversora S.A. (NYSE: NTL  )

20.7%

0%

N/A

11.6% / 33.4%

Telecom Argentina S.A. (NYSE: TEO  )

20.7%

17.6%

32.6%

11.8% / 34.2%

Cbeyond (Nasdaq: CBEY  )

20.4%

NM

16.5%

(1.2%) / 8.4%

Source: S&P Capital IQ. NM = not meaningful; EPS growth that is NM results from losses during the period. N/A = not applicable; analyst estimates that are N/A result from lack of analyst coverage.

Use the table above as a first step to help you generate ideas for your own further research. Once you identify stocks worth a closer look, the following three steps will help you further assess their growth prospects:

  • Carefully study the table for possible danger signs, such as high sales growth but low EPS growth, analyst growth expectations significantly trailing past growth, and low ROIC figures. Then follow the trail. Remember, the initial numbers can be misleading. For example, I own shares of Frontier and know that its free cash flow far outstrips its earnings, so the negative EPS growth isn't as big a deal to me.
  • Find out how the company achieved its prior growth: organically, or via acquisition? Can it sustain that previous growth? Going back to Frontier, its primary business is in a dying part of the telecom industry (rural landlines). Its growth is coming largely from a huge asset deal it sealed with Verizon last year. That has to be factored in.
  • Pay attention to how management plans to implement its growth plans. Does its strategy seem prudent and plausible to you?

Remember: The more profitable, efficient, and predictable growth a company can achieve, the more we investors should be willing to pay.

Learn more about any of the stocks that interest you by adding them to our My Watchlist tool. You'll get access to all the latest Motley Fool analysis, organized by company.

Anand Chokkavelu owns shares of Frontier. You can follow his thoughts on Twitter. Try any of our Foolish newsletter services free for 30 days. 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.


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  • Report this Comment On October 27, 2011, at 5:32 PM, GordieT wrote:

    I strongly believe that FTR Frontier Communications will show financial improvement and corporate strength in the third & fourth quarters of 2011& throughout all four quarters of 2012 resulting in haveing a share price of ten dollars per share by the end of 2012 My advice is to buy FTR & reap your profits at the end of 2012 and sit back & collect the dividends in the meantime.

  • Report this Comment On October 28, 2011, at 2:47 PM, pugwee wrote:

    News about the new FCC broadband looks very encouraging for FTR. Frontier also appears to be staying focused on the Verizon integration. I'm a little concerned about the class action suit against them.

    I've already own Frontier, but waiting to see how things pan out before buying more. But I do agree that right now Frontier is very cheap and has a lot of room for growth over the next few years especially with the new FCC ruling.

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