As expected, the telecom industry was severely affected by the financial crisis. Many companies had to cut their spending, and experienced revenue declines, as customers postponed new communication equipment purchases and service upgrades. On top of that, decline in readily available credit inhibited new investments. However, income inelastic telecom services like internet, GSM, home telephone services saved the telecom companies during the recession. Today's figures show that the sector growth has returned to its pre-crises level. Here is a brief analysis of the 7 largest U.S.-based telecom service providers:
AT&T, Inc. (T): AT&T announced that it acquired T-Mobile USA from Deutsche Telecom (DTEGY.PK) for $39 billion. The new combined entity will be the largest telecom service carrier in the US. On the other side, AT&T lost the iPhone exclusivity to Verizon (VZ) in the recent quarter. Taking a look at stock figures, AT&T is one of the largest telecom companies on earth with a market-cap of $185.44 billion. It also has P/E ratio of 9.28, while the forward P/E is 12.40. Despite the loss of iPhone market exclusivity, its earnings increased by 57.08%. The dividend yield of 5.53% puts AT&T among the top dividend picks for the next 5 years.
Verizon Communications Inc. (VZ): Verizon Communication, which is the second largest mobile provider in the US, has finally broken into the iPhone market since last January. Verizon has a market-cap with $105.88 billion. Although, the yields are juicy, shareholders experienced a negative EPS growth of -47.77%. The dividend payout ratio of 153.53% brings concerns about sustainability. Verizon has a profit margin 10.47%. Trailing P/E ratio is 30.22, whereas forward P/E improves to 14.48. RBC Capital Markets and Argus Stockbrokers have target prices of $41 and $44, respectively.
CenturyLink, Inc. (CTL): Louisiana-based CenturyLink is the third-largest local exchange carrier and internet service provider in the US. Market cap is a tiny $12.37 billion, compared to AT&T and Verizon. Stocks showed a declining trend with year-to-date return of -10.20%. CTL has reasonable P/E ratio of 13.03, and forward P/E is 13.46. The dividend yield of 7.11% is the highest among the top three. Shareholders enjoyed 22.47% EPS growth this year, however, analysts expect much lower annual growth rates for next one and five years: 2.71% and 1.82%, respectively.
Frontier Communications Corporation (FTR): Frontier offers local and long-distance telephone service, as well as broadband Internet and digital television services. Market cap is $8.23 billion. P/E ratio of 25.84 shows the stock is expensive. However analysts expect EPS growth of 18.75% for the next year. Despite having 89.90% gross margin, profit margin is 4.10%. FTR offers the highest dividend yield of 9.07%. Although stocks pursued a declining trend with YTD return of -13.04%, April performance of 4.42 is strongly positive. It may be a good short-term purchase.
Windstream Corporation (WIN): Windstream, a spinoff of Alltel's local phone division and Valor Telecom, is a relatively young broadband and telecommunications company. Company provides local and long distance services, broadband internet, and DISH Network Satellite TV services. It has a market-cap of $6.53 billion, and P/E ratio of 19.41. For the past years EPS growth has been -7.05%. However, shareholders enjoyed a dazzling dividend yield 7.81% thanks to the steady growth since 2009. Stocks showed more than two-fold increase; from $6 to $13.87. Similar to Frontier, WIN has a negative year-to-date performance -6.29%. It might be a good opportunity to dive in. The DISH network business has the potential to lift Windstream among the media titans in the next 5 to 10 years.
Equinix, Inc. (EQIX): Equinix is a global company providing network-neutral data centers and interconnection services in 11 countries. It has a market cap of $4.65 billion. Current P/E ratio is 121.78, but, analysts expect higher growth this year: Forward P/E estimate is 28.84, which is still above sector average. Shareholders enjoyed annualized EPS growth 89.24% for last five years. This year, EPS growth estimate is 66.99%, and analysts expect 32.04% annual EPS growth in following five years. Prices increased by 2.5-fold from $40 in 2009 to $100 in 2011.
TW Telecom Inc. (TWTC): TW Telecom is a high-tech service provider which specializes in business-class managed voice, internet and data network services, as well as local and long distance services. Similar to Equinix, TW Telecom has no dividend policy. Market cap stands at $3.24 billion, with a P/E ratio of 13.90. Analysts expect EPS growth of 42.50% this year with a long-term estimate of 21.75% growth for following five years. TWTC has the lowest PEG of 0.64. 21.32% profit margin is one of the best in the industry. Share prices increased by more than four-fold in two years; from $5 in 2009 to $21.54 in 2011.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in WIN over the next 72 hours.