M2's unsatisfying 50% growth

Investors were disappointed by the lack of upgrades at M2 Telecommunications Group’s (MTU) annual general meeting today with the stock spending the day trading in the red.

Management reaffirmed its wide 2013-14 guidance with net profit expected to hit $60 million to $70 million on sales of between $970 million and $1.03 billion. This marks around a 48% increase over the previous year, if the midpoint of the guidance range is used.

Investors wanted more and sold the stock down 1.5% to $5.93 in afternoon trade. This is the problem with consistently over-delivering – expectations eventually factor in more than management is forecasting.

And M2 may have limited opportunities to beat its guidance significantly this year as it has done in previous years through acquisitions. This is because management is probably too busy bedding down the sizable Dodo and Eftel takeovers.

Some critics believe M2 is nothing without acquisitions as it is hard to work out how strong organic growth is when the business is constantly changing. Best guess is that organic growth is lower than its peers, such as Amcom Telecommunications (AMM) and that is why M2 has always traded at a discount to the latter (see Big expectations for small caps).

While the argument may be valid, this shortcoming is more than factored into M2’s share price as the stock is trading on a 2013-14 price-earnings multiple of under 12 times (if the midpoint of guidance is used).

M2 and Amcom are both part of the Uncapped 100.