I think TPG Telecom Ltd (ASX: TPM) is a better telco pick than Telstra Corporation Ltd (ASX: TLS).

TPG Telecom is one of Australia’s largest broadband and mobile phone providers, with around 2 million broadband subscribers. In 2018, TPG planned to merge with the owner of Vodafone Australia, Hutchison Telecommunications (ASX: HTA), in a potential $15 billion deal.

Why I’d Pick TPG Shares Over Telstra Shares

Telstra is clearly Australia’s largest telco, but I think that means it’s the best. In-fact, I believe that just puts a bigger target on the company’s back for competitors like TPG, Amaysim Australia Ltd (ASX: AYS) and others.

The strength of Telstra was previously built on its cable infrastructure that it could sell access to others for a good price with a monopoly setup.

But, with all of the telcos now all competing with each other to sell NBN services, the only differentiation is brand & price for the customer and operating expenses for the telco.

TPG and iiNet (both part of the TPG group) have built good customer recognition for price and brand/customer service quality respectively.

Meanwhile, TPG has a leaner operating model than Telstra so it can either offer a cheaper price or generate a higher profit margin from its NBN services. That’s why Telstra is looking to seriously reduce its workforce and costs – which will take years to finish and a lot of redundancy costs in the meantime.

On the mobile side of things TPG is trying to merge with Vodafone to form an Australian powerhouse to compete with Telstra’s dominance. A combined entity would have even stronger operational cost benefits and it would only have to construct one 5G network rather than two.

Looking at the CommSec estimates, TPG is valued at 21 times the estimated earnings for the 2020 financial year. If the Vodafone merger goes ahead I think TPG is likely to be a much better idea than Telstra.

But neither of them are going to grow fast these days, the rapid growth shares in the free report below could grow a lot more.

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At the time of publishing, Jaz does not have a financial interest in any of the companies mentioned.