Is the Telstra Corporation Ltd (ASX: TLS) share price a buy?

Telstra shares are still down 14% from the level it was at on 21 February 2020. But it hasn’t actually recovered much from the date when the S&P/ASX 200 Index (ASX: XJO) hit the COVID-19 low. Since 23 March 2020, the Telstra share price is only up 4.2%.

Perhaps that underperformance now means that Telstra is comparatively good value?

Maybe Telstra’s regular earnings aren’t given enough credit. We all need to pay our telecommunications bill to stay connected to the internet. The last few months has shown how important the internet is for many of us to work at home, be entertained or connect with family and friends.

However, Telstra’s revenue and earnings doesn’t increase by 10% if we use 10% more data in a month. These days consumers get a very generous amount of data so you’d have to watch a lot of online movies in ultra-high definition to use all of your allocated data.

Telstra’s share price has suffered in recent years as Australia shifted to the NBN. It was much easier for Telstra to make good profit when it owned all of the cable infrastructure. Now Telstra must compete on a level playing field with everyone else, with lower profit margins. The NBN has to recoup the money spent on it, which hurts the telco margins.

What is there to be positive about Telstra’s share price?

The FY20 half-year result was actually fairly positive. Telstra’s underlying earnings before interest, tax, depreciation and amortisation (EBITDA) declined by 6.6% to $3.9 billion. However, excluding the in-year NBN headwind, underlying EBITDA increased by approximately $90 million. That’s the first time this figure had grown since FY16. But then COVID-19 hit the world. 

Telstra is now expecting its free cashflow and underlying EBITDA to be at the bottom range of its guidance range. Free cashflow after operative lease payments was expected to be between $3.3 billion to $3.8 billion.

Considering how low interest rates are now, I think Telstra’s cashflow should be valued higher than before. Therefore the Telstra share price should be higher too, in theory. The same could be said about the dividend. The Telstra dividend should be more valuable than it was before interest rates were reduced.

I don’t think Telstra will want to cut the dividend any lower than the current 8 cents per share it’s paying every six months. I don’t think the annual fully franked dividend will go lower than 16 cents per share in the foreseeable future. This equates to a grossed-up dividend yield of 7%. I think that’s solid in today’s environment.

The best reason to be positive about Telstra is the coming of 5G. The world has changed a lot since 4G was released. There will probably be new services that we can’t even think of yet. Automated cars will need a high-quality connection for what they’ll do. The ‘Internet of Things’ change is going to need a good connection to enable our devices to connect where they need to connect. 

Is Telstra a buy today?

Telstra is currently trading at 21x FY22’s estimated earnings. I fear that 5G could turn into a race to the bottom for telcos again like how 4G has done. There’s lots of low-price competition for Telstra like Aldi Mobile, Boost Mobile and Amaysim Australia Ltd (ASX: AYS).

As investors we should want to invest in businesses that can grow over the long-term with good economic moats.

I’m not sure what Telstra’s future looks like because the economics of 5G look unclear. It was companies like Facebook, Alphabet and Netflix that managed to capture a lot of the value creation by the 2010s technology changes. Will telcos be able to change that with 5G? If you think so, then perhaps Telstra is cheap today. But I’m not convinced it is a good buy.

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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.

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The S&P/ASX 200 Index (ASX: XJO) climbed higher today to 5,992 points.

At one point today the ASX 200 was actually in negative territory, hitting a low of 5,934 points. But there was an afternoon rally to ensure the ASX had another positive day.

Here are some of the main highlights from the ASX 200:

Carsales.com Ltd (ASX: CAR) share price driven higher by FY20 guidance

The online car classifieds business released an update today which included FY20 guidance.

Companies with a financial year end date of 30 June 2020 are close to finalising the year. Carsales wanted to provide the market with an estimate for its FY20 result.

The numbers were provided on a continuing operations basis, which excludes Stratton. All of the numbers are unaudited and are subject to the audit process.

Carsales also warned of uncertainty given the impact of COVID-19. Adjusted revenue, which includes $26 million of revenue billed but not charged, is estimated to be in a range of $419 million to $423 million. This would mean revenue will be flat or achieve growth of 1%.

FY20 Adjusted earnings before interest, tax, depreciation and amortisation (EBITDA) is estimated to be between $228 million to $232 million, which would equate to growth of 5% to 6%.

Fy20 Adjusted net profit after tax (NPAT) is estimated to be in a range of $134 million to $138 million. This would equate to profit growth of 3% to 6%.

In terms of trading conditions, Carsales said that overall lead and traffic volumes have continued to improve as social distancing measures have eased. According to Carsales, between 22 April 2020 and 16 June 2020 lead volumes have grown very strongly on the prior corresponding period of 2019.

The trends in Brazil and South Korea have continued. Management said that Encar continues to perform well with key operating metrics of inventory, listing volumes and traffic are all growing with continued growth of revenue and EBTIDA on the prior corresponding period. However, escalation of COVID-19 in Brazil is affecting Webmotors’ financial and non-financial metrics.

Carsales has refinanced its debt and also commented that it doesn’t anticipate changing its dividend policy of paying 80% of adjusted net profit after tax.

Highs and lows of the ASX 200

Looking at the best and worst performances in the ASX:

The Clinuvel Pharmaceuticals Limited (ASX: CUV) share price went up 8%.

A2 Milk Company Ltd (ASX: A2M) saw its share price climb 7.8%, perhaps due to a broker note.  

The WiseTech Global Ltd (ASX: WTC) share price went up 5.9%.

The share price of Fisher & Paykel Healthcare Corp Ltd (ASX: FPH) grew by 5.3%.

At the red end of the ASX, the worst three performers were:

The Pilbara Minerals Ltd (ASX: PLS) share price declined 5.4%

Mayne Pharma Group Ltd (ASX: MYX) suffered a share price fall of 5.2%.

The Webjet Ltd (ASX: WEB) share price went down 3.2%.

CSL Limited (ASX: CSL) loses its chief financial officer

ASX 200 healthcare giant announced today that CFO David Lamont is leaving to join BHP Group Ltd (ASX: BHP).

Mr Lamont is credited with transforming CSL’s finance function during a significant period of growth for the company. CSL said he was influential on several important projects including reshaping CSL’s enterprise resource planning.

Mr Lamont said: “I am delighted to rejoin one of the best companies in the world. BHP has strong values and a robust financial position, making this an exciting opportunity to be part of a team that can generate returns to shareholders over the long term and make a positive difference to local communities and global markets. I look forward to working with Mike and the team.”

There will be a handover period where the current BHP CFO ensures an orderly transition and Mr Lamont will fully take over in about six months. 

More reading

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Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of CSL Ltd. and WiseTech Global. The Motley Fool Australia owns shares of and has recommended Webjet Ltd. The Motley Fool Australia owns shares of A2 Milk. The Motley Fool Australia has recommended carsales.com 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.

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