For investors in the telecoms industry, the next few years are set to be hugely turbulent. Thats because the level of competition in the industry is expected to grow, with a number of companies set to enter the mobile telecoms space and many others due to begin offering fixed-line packages to their customers.
In fact, the advent of quad play (the offering of broadband, pay-tv, fixed-line and mobile telecoms) is a major change for the media industry as a whole. Certainly there will be winners from the change, but there will also be losers. And, on this front, it appears as though Vodafone (LSE: VOD) will fall into the former category and BT (LSE: BT-A) into the latter.
Of course, BT is a dominant player in the fixed-line and broadband sectors. It has increased its customer base in recent years at a rapid rate and has been able to most successfully market the benefits of superfast broadband. However, its strategy of winning new customers on heavily discounted deals appears to be taking a toll on its bottom line. In fact, BTs earnings are set to fall by 3% in the current year and, as well as high discounts, the investment in new products such as pay-tv has also caused BTs short term financial performance to suffer.
Furthermore, BTs strategy of moving into pay-tv and mobile is taking place at a rapid rate. For example, it launched BT Mobile recently but has also bid 12.5bn for mobile network EE. This may give BT access to the largest number of subscribers in the mobile space but, with a balance sheet that remains less robust than its investors would like, the company appears to be taking considerable risks in order to expand its product offering. For example, BT has a pension liability of 7.5bn as well as debt of 9.8bn on its balance sheet, with net assets being just 800m.
Vodafone, meanwhile, is also embarking on an expansion of its product offering. Like BT, it is making acquisitions (such as Spains Ono and Kabel Deutschland), but unlike BT, Vodafone appears to have the balance sheet to withstand such activities. In fact, Vodafone has a pension liability of just 600m, total debt of 35bn and net assets of just under 68bn. Therefore, its balance sheet seems very capable of coping with higher levels of borrowing to fund further acquisitions without incurring excessive levels of risk.
Looking ahead, Vodafones forecasts are very positive. The company is expected to deliver a rise in earnings of 20% next year, which puts it on a price to earnings growth (PEG) ratio of just 1.8. This indicates that its shares could move considerably higher and, with it having a high exposure to Europe, the impact of quantitative easing could provide a boost for its bottom line over the medium to long term. And, with Vodafone set to expand into new product areas, its customer base could increase and positively impact its financial performance, too. As a result, now appears to be a good time to buy a slice of it.
Of course, Vodafone isn’t the only company that could be worth buying at the present time. With that in mind, the analysts at The Motley Fool have written a free and without obligation guide called 5 Shares You Can Retire On.
The 5 companies in question offer stunning dividend yields, have fantastic long term potential, and trade at very appealing valuations. As such, they could deliver excellent returns and provide your portfolio with a major boost in 2015 and beyond.
Click here to find out all about them – it’s completely free and without obligation to do so.
Peter Stephens 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.