What The End Of Sprint's Unlimited Data Plan Would Mean For Smartphone, Telecom Stocks

 |  Includes: AAPL, CMCSA, S, T, VZ
by: Investment Underground

By Larry Gellar

A new report says that Sprint Nextel (NYSE:S) might have to back off from the unlimited data plan it currently offers. If that does indeed happen, shockwaves will reverberate throughout the wireless industry. While AT&T would clearly be affected, Apple (NASDAQ:AAPL), Clearwire (CLWR), and Comcast (CCT) are three more companies to keep an eye on. For example, many iPhone users have been switching to Sprint because of the data plan. Let’s see which of these stocks is a buy right now.

Sprint Nextel Corp. has slipped in the past few months, and discontinuing the ever-popular unlimited data plan could send this stock plummeting. On the other hand, the minority of cell phone users who download gigabytes upon gigabytes of data could force Sprint’s hand.

The limited number of wireless airwaves is another thing that’s been giving Sprint trouble, according to Reuters. More specifically, Sprint only has 10 megahertz set aside for its Long Term Evolution network, the latest technology in the race for fast wireless Internet. While some analysts are speculating that Sprint will eventually need to put caps on how much data people can use, Sprint may be able to impress potential customers by setting a cap significantly higher than its competition.

One Sprint executive, Bob Azzi, remains confident, however, telling Reuters: “I don't consider it a headache. We have a good understanding of the nature of those plans and what they do.” One important competitor for Sprint is Verizon (NYSE:VZ). Verizon’s price to sales ratio is over four times Sprint’s, and part of that can be explained by Verizon’s great margins. Those numbers are 61.14% gross and 22.35% operating. Meanwhile, investors should note that Sprint’s net income for the last 12 months has been -$2.52 billion.

AT&T, Inc. (NYSE:T) has been volatile the past few months, as investors try to figure out what’s going to happen next with the company’s acquisition of T-Mobile. That proposed deal has drawn quite a bit of attention from U.S. regulatory authorities, and AT&T and T-Mobile are now executing a retreat of sorts. Here’s what a joint press release from AT&T and Deutsche Telekom (OTCQX:DTEGY) (current owner of T-Mobile) said:

AT&T Inc. and Deutsche Telekom AG are continuing to pursue the sale of Deutsche Telekom’s U.S. wireless assets to AT&T and are taking this step to facilitate the consideration of all options at the FCC and to focus their continuing efforts on obtaining antitrust clearance for the transaction from the Department of Justice.

Also of importance is that AT&T will deduct $4 billion from its net income since it may have to pay Deutsche Telekom (OTCQX:DTEGY) a fee because of the failed merger. In fact, some are speculating that this fee (along with spectra and roaming agreements) that T-Mobile would receive could strengthen T-Mobile to the point that the wireless market as a whole is hurt. For example, MetroPCS (PCS) and Leap Wireless (LEAP) are two companies that T-Mobile might take market share away from.

Apple Inc., like AT&T, has been volatile in the past quarter, and at least one other Seeking Alpha writer thinks the company could be losing its edge. As discussed here, phones from HTC and Samsung (OTC:SSNLF) are gaining market share. Sales are still great at Apple, of course, but increasingly stronger competition that doesn’t mind selling at a discount could pose a significant threat.

Apple is also notable for its lawsuit against Samsung in regards to the style of Samsung’s smartphones. While that lawsuit probably won’t be ultimately successful, it did force Samsung to change a few things before a release in the European Union. (A good bullish perspective on Apple can be found here.)

Theoretically, an iPad mini would compete well with Amazon’s (NASDAQ:AMZN) Kindle Fire, and the iPad 3 could have some very attractive features. Besides Amazon, important competitors for Apple include Google (NASDAQ:GOOG), Hewlett-Packard (NYSE:HPQ), and Research In Motion (RIMM). Apple has the second-highest price to earnings and price to sales ratios behind Google, although Apple’s price/earnings to growth ratio is the lowest. Apple’s margins are pretty solid, with gross margin at 40.48% and operating margin at 31.22%. Meanwhile, quarterly revenue growth has been a spectacular 39%.

Clearwire Corporation has struggled mightily the past few months, but the company remains a key player in Sprint’s business strategy. Sprint owns the majority of Clearwire, and it has been trying to convince Clearwire to allow it to use Clearwire’s LTE network. Here’s the snag, though: Clearwire doesn’t have all the financing it needs for its LTE network. In the past, Sprint has used Clearwire’s WiMAX network, but LTE is by all accounts the better choice.

Another problem in the financing department for Clearwire is a $237 million debt payment that’s coming up. Here’s what CEO Erik Prusch recently said about it:

It's a very expensive payment that we have. It would be a significant drain of our cash, so we have to evaluate everything in terms of our decision of where we're going.

In other words, Clearwire may simply choose not to make the debt payment. That has investors worried, although back in October there was some insider buying to suggest that this stock was more attractive than many are figuring. One important competitor for Clearwire is CenturyLink (NYSE:CTL). That stock has more traditional value metrics than Clearwire – those numbers for CenturyLink are 23.58 (price to earnings), 1.26 (price/earnings to growth), and 1.77 (price to sales). Meanwhile, Clearwire margins are horrific, with gross margin at 5.97% and operating margin at -161.14%.

Comcast Corporation has been somewhat volatile the past few months, and this company remains an important player in a world with no AT&T-T-Mobile merger. That’s because T-Mobile might look for Comcast to acquire it, or at the very least form a partnership with it. Meanwhile, Comcast stock could be boosted a bit by the fact that it appears that the NBA lockout will end soon. Outside of a few peripheral details, a deal is in place for the NBA season to start on December 25. That’s big for Comcast because the cable operator broadcasts numerous NBA games through the variety of stations that it offers.

Another piece of news for Comcast is that CFO Michael Angelakis will also be the vice chairman now. That doesn’t mean Angelakis will be joining the board, but he will take on additional responsibilities. Important competitors for Comcast include DIRECTV (DTV) and Dish Network (NASDAQ:DISH).

While DIRECTV has about the same price to earnings and price to sales ratio as Comcast, Dish Network is notably cheaper using these measures. Comcast’s price/earnings to growth ratio is the same as Dish Network’s and significantly higher than DIRECTV’s. As for margins, Comcast is pretty strong, with gross margin at 52.92% and operating margin at 19.85%.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.