AT&T vs. Verizon - Which Is Better Positioned for the Future?

Includes: T, VZ
by: Value Expectations

AT&T (NYSE:T) and Verizon (NYSE:VZ) are the clear front-runners in the wireline/wireless industry. These telecom giants within the S&P 500 currently maintain market caps of nearly $150 billion and $90 billion, respectively, with Sprint (NYSE:S) coming in at a distant third, with a market cap of $12 billion. This begs the question: which of the two is better positioned for the future?

Jake Kimble from Bullish Bankers, recently wrote an informative article on the two companies. From a qualitative standpoint, AT&T seems to have the stronger 3G network, and that is strongly complemented by the most formidable smart phone on the market, the iPhone, which is exclusively contracted through the company. Verizon’s 3G network is decent, and is supported by a variety of phones including several models of the Blackberry, which has also been a recent trend. Going forward though, VZ seems to be putting itself in a much better position than its competitor. The company continues to build out its FiOS fiber optic network. FiOS is a fiber-to-the-premises network (FTTP) supported by lightning fast fiber optics, which are considered to be a huge upgrade from the traditional coaxial cables currently in use, and should be the way of the future.

AT&T’s fiber-to-the-node (FTTN) network only places its fiber optic network in between communities, in an effort to save costs, and runs copper coaxial cables from the outer premises to each individual house. This shortcut limits the speed of the data carried across the line. Accordingly, VZ is recently adding more FiOS customers per quarter than AT&T’s U-Verse, despite the fact that it currently has less availability. Verizon continues to build this network out and is finding cheaper ways to do so as it goes. As bandwidth continues to grow and consumers increasingly demand higher quality data and video, VZ’s investment should continue paying off, especially with an economic recovery.

Furthermore, VZ has also taken a forward-looking perspective on the wireless front, as it continues to develop its 4G network. This network will handle more wireless services and with better speed and quality than 3G. VZ plans its commercial launch of its 4G network in 2010 in 30 metropolitan areas, whereas AT&T is not looking to deploy its 4G network until 2012.

So while AT&T seems to have a clear competitive advantage over VZ in the current wireless market, the tide may begin to turn in the near future as the landscape and capabilities in the telecom sector continue to change and advance. To add further perspective, decided to analyze both companies from a valuation standpoint using AFG’s valuation model (Value Score). Using this analysis, Verizon currently looks to be an attractive play, while AT&T looks overpriced.

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Verizon Vs. AT&T
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Applied Finance Group’s (AFG’s) Value Score defined - A score which represents the ranked percent to target (deviation between stock’s current trading price and AFG’s current default target price) or attractiveness (upside) relative to the universe. A Value Score of 100 is the most undervalued and 0 is the most overvalued company in the universe.