4 Wireless Companies That Will Sink Or Swim

Includes: S, T, VZ
by: Investanomics

The wireless industry has been a real competitive environment lately with carriers looking for any way to get ahead. Consolidation has always been a way for carriers to eliminate competition and gain needed scale to compete with much larger rivals. With many of the old national carriers out of the way, many smaller carriers are now starting to show signs of weakness. Here is my analysis on how these four carriers will fare in this extremely competitive environment.

AT&T (NYSE:T) - AT&T has fared well since it lost the Apple (NASDAQ:AAPL) iPhone exclusivity. The company has lost a lot less iPhone customers than previously expected and is currently trying to become the largest national carrier by purchasing T-Mobile. Even though I feel that the merger will not gain government approval, AT&T may be providing investors with an opportunity to buy. The company currently pays a dividend yield of around 6 percent. AT&T recently announced it would take a $4 billion charge if the T-Mobile deal failed to go through. This charge should not have a big effect on AT&T's business nor its ability to pay its dividend.

Sprint (NYSE:S) - Sprint has been struggling to remain competitive. The latest numbers showed that Sprint gained over 1 million subscribers in the last quarter. It appears that a program called Assurance Wireless has helped Sprint make big strides in the low income market. The government pays companies like Sprint as much as $10 per month to offer free or discounted wireless plans to qualifying subscribers. Sprint says that more than half of its recent subscriber gains are due to the Assurance Wireless program.

My concern with Sprint is the company's plan to buildout its 4G LTE network as well as its agreement to purchase Apple iPhones. These expenses will be an additional burden on Sprint which already carries a heavy debt load. Sprint recently announced that it may experience a cash shortfall of up to $2.2 billion in 2012 and $5.2 billion in 2013. Sprint is seeking up to $3 billion in vendor financing to cover its network investment. Sprint continues to bleed money despite the subscriber gains. Sprint is also in the tough situation where it must invest in LTE just to remain competitive. I don't see a quick turnaround anytime soon and believe Sprint is at risk of losing a significant amount of money in its Clearwire investment.

Clearwire (CLWR) - Clearwire has been in the news lately, but mainly for the wrong reasons. The company has been looking for investors to invest in its network expansion. Clearwire is seeking $600 million to fund its network buildout and about $300 million to operate it. Clearwire has been struggling to find investors to fund its network buildout. Sprint has recently announced that it may invest part of its bond proceeds in Clearwire. This mainly has to do with the lack of interest from outside investors.

Clearwire is in a very dangerous situation with its money burning up fast. The company announced that it may skip a $237 million debt payment which is due in two weeks. Clearwire is doing all it can to conserve money and attract investments. I believe that Clearwire will eventually file bankruptcy if it can't find outside financing. Sprint will try everything it can to save its investment, but it won't be able to support Clearwire indefinitely. I believe sooner or later Sprint will realize that it can't support two money losing operations and will be forced to restructure Clearwire.

Verizon (NYSE:VZ) - Verizon has remained relatively quiet and has focused on its business instead of attacking other carriers. This strategy has worked well for Verizon. The company's wireless EBITDA margin hit an all-time high of 47%. The company has also seen strong growth in just about every part of its business. The wireless business had an impressive quarter with solid growth in postpaid connections. Total revenue grew to $17.7 billion in the quarter, up 9.1% year-over-year. Retail service revenue, which includes both postpaid and prepaid, grew 6.9% year-over-year.

I'm bullish on Verizon and expect the company to continue to grow its business as competitors remain distracted. Verizon currently pays a 5.66% percent dividend that is safe. The company's financial position is strong from a balance sheet perspective. Net debt at the end of September was $44.6 billion, and the net debt to adjusted EBITDA ratio is about 1.3x. Verizon also recently approved a 2.6% dividend increase, that marked the fifth straight year of dividend increases.

Disclosure: I have a short position in CLWR, and may initiate a long position in AAPL, T, VZ over the next 72 hours.