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During this analysis I will utilize my investment strategy outlined in my first article.

To summarize, I use a weighted analysis of cash flow, liquidity, profitability, return, size and valuation. I chose ten metrics that I deem crucial to my portfolio. They are: Current Ratio (4%), Long-term Debt to Assets (5%), Cash Flow per Share (10%), Net Profit Margin (6%), Dividends (5%), Market Capitalization (1%), Shares Outstanding (1%), Price to Cash Flow (25%), Free Cash Flow to Operating Cash Flow (23%), Operating Cash Flow to Sales (20%). To perform my analysis, I rank each of the companies against one another based on their performance of each of these metrics. Therefore, if I rank five companies, the strongest score would be five, by virtue of receiving a five rating in every category.

For purposes of this article, I have analyzed five companies in the telecommunications industry with regard to their third quarter 2013 information. Going forward, I would like to conduct this type of analysis on a quarterly basis. The companies I chose are: AT&T (T), Comcast (CMCSA), Shenandoah (SHEN), Time Warner Cable (TWC) and Verizon (VZ). Here is how each of the companies performed:

Weight

T

Rank

VZ

Rank

CMCSA

Rank

SHEN

Rank

TWC

Rank

Price (1/10/14)

$33.62

$47.75

$53.54

$23.98

$133.36

Market Capitalization

1%

177.51

5

136.65

3

140.03

4

0.57575

1

38.11

2

CF/Sh to price

10%

5.16%

4

8.23%

5

2.85%

1

3.65%

3

3.17%

2

Shares Outstanding

1%

5,280

5

2,860

4

2,620

3

24.01

1

285.78

2

Dividend %

5%

5.47%

5

4.44%

4

1.46%

1

1.50%

2

1.95%

3

Current Ratio

4%

0.51

1

2.43

5

0.72

3

2.31

4

0.54

2

LTD to Assets

5%

24.89

5

32.87

3

28.22

4

38.53

2

49.04

1

Net Profit Margin

6%

12.14

4

18.42

5

11.01

3

8.67

1

9.64

2

P/CF

25%

4.9

4

3.9

5

9.3

1

6.2

3

7.1

2

OCF/Sales (CF Margin)

20%

29%

4

37%

5

25%

2

27%

3

22%

1

FCF/OCF

23%

36%

3

61%

5

51%

4

-52%

1

35%

2

100%

3.77

4.82

2.29

2.32

1.80

Based on my analysis Verizon would be the strongest telecommunications company to add to my portfolio. As explained earlier, I place the most emphasis on cash flow. As you can see Verizon ranks very high with metrics that are a derivative of cash flow. Thereby, leading to its strong rating. Since AT&T and Verizon are the two highest ranked companies, I would like to take a deeper look at their cash flows over the previous five quarters.

AT&T

AT&T has seen a very significant decrease in cash flow since third quarter 2012. The fact that their free cash flow has decreased from $6.54B to $3.27B in the span of fifteen months is particularly worrisome for the upcoming earnings report and guidance. Although their sales have increased 2.2% in five quarters, I don't think the fourth quarter will be strong enough to foster a significant change in their cash flow.

VZ

Verizon is a remarkable story of free cash flow growth. Third quarter 2012 they reported $1.8 billion in free cash flow. As of third quarter 2013, free cash flow was reported at $6.9B. This results in growth of 285% through five quarters, which is truly astonishing. Moreover, Verizon's sales have grown 4.4%, just about twice that of AT&T.

Conclusion

Both companies will report their fourth quarter 2013 earnings this month. Verizon is first on January 21, whereas AT&T will report on January 28. It will be interesting to see the guidance that both companies suggest. AT&T will really have to make significant changes to reverse the path of their decreasing cash flow. Eventually, Verizon should return more of their free cash flow value to the shareholders. I expect Verizon to maintain strong performance and would like to add it to my portfolio by virtue of its respectable valuation and strong cash flows.

I invite you to please provide feedback as I plan to develop my strategy, profile and system in the future. I find criticism and questions very beneficial.

Source: Cash Flow Suggests Buying Verizon And Selling AT&T Before Earnings