In a market where high- flyers like Pro Medicus (PME), Goodman Group (GMG) or Xero (XRO) look so expensive, and “ugly ducklings” such as Ramsay Health Care (RHC) remain out of favour, it is hard to identify stocks that I want to buy. But here are two, for different reasons and different objectives – yield and growth.
- “Boring” Telstra (TLS)
The problem with Telstra is that it is a super boring company, and most retail investors already own it! But there is no arguing the attractiveness of the stock as an income play.
I like Telstra because:
- Being the dominant player in an industry of only three substantive competitors (Telstra, Optus and Vodafone/TPG), it is not a monopoly but it’s close.
- It has been able to hold share and increase ARPU (average revenue per user) in the mobiles market, which now accounts for over 55% of earnings.
- It is dealing with its problem child (the enterpriser/big corporate market), which has been a drag on earnings.
- Earnings are increasing. From FY21 to FY24, underlying EBITDA grew at a compound annual growth rate of 7%. For FY25, Telstra is guiding to underlying EBITDA of between $8.5bn and $8.7bn, up from $8.2bn in FY24.
- The dividend is increasing. After years where it was stuck at 16c per share, it paid 18c per share for FY24 and is set to rise moderately again in FY25.
- There is potential upside for shareholders if it divests of its half share in Amplitel (the company that owns the mobile towers) or its fixed infrastructure business; and
- It is not a volatile stock.
On a yield basis, Telstra is forecast to deliver 4.8% fully franked in FY25. This compares favourably to the major banks: CBA’s 3.0%, NAB’s 4.3%, Westpac’s 4.5% and ANZ’s 5.7% (the latter only partly franked).
The brokers are relatively positive on Telstra. According to FN Arena, the consensus target price is $4.18, about 5.9% higher than the last ASX price of $3.95. Most brokers have a target price around $4.40 to $4.50. Morgans is the odd one out with a target of just $3.20, arguing that Telstra is “expensive” on a PE basis compared to its 10 year historical average and that of incumbent international peers.
Telstra (TLS) – last 12 months
Source: nabtrade
But I don’t think income seekers are going to worry about Morgan’s concerns too much. Telstra is good value.
- CAR Group (CAR) for growth
Any company which has a track record of delivering increasing sales, profit and earnings per share is worth serious consideration. CAR Group (CAR), as the chart below demonstrates, is in that category.
The old carsales.com, CAR Group is the dominant player in the Australian used car marketplace (trade and private). It also owns market leading businesses in the USA, Brazil, Chile and South Korea, with the offshore businesses now contributing 60% of revenue and 50% of earnings.
The challenge for CAR is to drive revenue and earnings growth. CAR’s strategy is to do this by expanding the leadership positions of its online marketplaces, digitising services, new premium depth products for sellers, creating a seamless experience for private buyers and sellers, media expansion by connecting advertisers to its audience and opportunities in adjacent markets.
CAR says that it has a highly resilient and counter-cyclical business model. It is guiding in FY25 to “good growth” in revenue, adjusted EBITDA and adjusted NPAT on a constant currency basis, with similar margins. All market segments are forecast to deliver “good”, “strong” or “solid” growth in FY25, with Latin America the standout.
The brokers like CAR, although most see it as close to fully priced. According to FN Arena, they have a consensus target price of $39.30, about 1% lower than the last ASX price of $39.69.
CAR Group (CAR) – last 12 months
Source: nabtrade
On multiples, the brokers have it trading currently on a multiple of 40.1 times forecast FY25 earnings and 34 times forecast FY26 earnings.
Yes, CAR is expensive. But I think you back a business that is the leading player in its market segments and has a demonstrable track record in revenue and profit growth.
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.
