Up untilthe beginning of July this year,TalktalkTelecom(LSE: TALK) was one of the markets hottest growth stocks. In the three years to 2 July, Talktalks shares rallied 163% as the company targeted pre-tax profit growth of 370% over the short space of just three years.
However, Talktalks troubles began soon after its shares hit an all-time high at the beginning of July. Around a month after reaching this critical high water mark, Talktalkissued a profit warning and two months after that, the company announced that it had been the target of a sustained cyber attack. After this series of unfortunate events, Talktalks shares have slumped 41% from their peak.
Nonetheless, Talktalks management seems to be surprisingly upbeat about the companys prospects despite the turmoil of the last six months.
Alongside the groups first-half results, which were released after the hack attack had taken place, managementstated thatthe company is on track todeliver full-year results in line with market expectations. The City is currently expecting the group to report a pre-tax profit of 147m and earnings per share of 12.9p for the full-year.
Unfortunately, I dont share managements optimistic outlook. You see, for the first-half of the yearTalktalkreported a pre-tax loss of8m, compared with a profit of 20m in the same period last year as the companys increased by 28m. Whats more, the fullfallout from the cyber attack is not yet known.
Room to disappoint
Talktalks costs are rising, and its not known how many customers decided to leave the company after the significant and sustained cyber attack the company suffered during October. The company itself has said that the attack will result in one-off costs of 35m. Although, management seems to believe that this one-off cost wont affect profits for the year as a whole.
These factors lead me to conclude thatTalktalks management is setting the company up to disappoint further down the road. It seems silly for management to state that the company is on track to meet full-year forecasts after the events of the last few months.
Moreover, Talktalks shares are currently trading at a forward P/E of 19.7, which doesnt leave much room for disappointment.
A better pick
Theres no other way of putting it, Talktalks future is extremely uncertain and until investors receivesome clarity about the long-term effects of the cyber attack,BT(LSE: BT-A) looks as if it could be a better investment.
At first glance, BT is cheaper than Talktalk. The company currently trades at a forward P/E of 15.2. Earnings per share are expected to fall by 3% this year but rebound 7% during the companys next fiscal year.
Still, the biggest difference between BT andTalktalkis size. UnlikeTalktalk, which has to spend heavily to convince customers to switch to its service, BTs size and reputation draws customers to its offering, despite its higher price.
Overall, if youre looking for a solid long-term investment, Id say BT is the best choice.
Doyour own research
This is just aroughappraisal BT’s prospects. Before making a trading decision, you should conduct your own research to see if the company is suitable for your portfolio and financial goals.
To help you assess potential investments for yourself, our top analysts have put togetherthis report, which guides you through thetenessential steps you need to take to become a stock market millionaire.
Thereport explainshow spending just 20 minutes a month could help you create a portfolio that could bring you closer to financial freedomfor life.
Click hereto check out the report–it’s completely free and comeswith nofurther obligation.
Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.
