4 Telecom Stock Alternatives To AT&T

Includes: AMX, T, TDS, TMUS, VZ
by: Investment Underground

By Robert Gordon

The old AT&T (NYSE:T) was broken up on antitrust grounds in 1984, and like the proverbial Phoenix, has been revived bigger than ever. Of the eight companies formed by the break up of the old AT&T, five of them have recombined into the new AT&T. But the new AT&T, meaning since 2006, is no longer the sole integrated telecommunications company out there. Verizon Communications, Inc. (NYSE:VZ), and on a smaller scale, MetroPCS Communications, Inc. (PCS) and Telephone and Data Systems, Inc.(NYSE:TDS) compete more or less directly with AT&T. America Movil S.A.B de C.V. (NYSE:AMX) is the largest provider of wireless in Latin America. I will be comparing these companies' metrics and prospects, to determine which among them might appeal best to certain types of investors.

Let’s get a quick glance of what I am looking for:


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For this article, I will utilize AT&T as a baseline stock for comparison.

Verizon Communications, Inc. (VZ)

Verizon is the most direct competitor to AT&T, in that has a large wireless and wireline footprint. Unlike AT&T, it does not own any wireless network in full. Rather, it shares ownership of Verizon Wireless with it owning 55%, and Vodaphone Group, PLC. (NASDAQ:VOD) owning 45%. What jumps out about VZ most dramatically in the chart above is that it doubled its quarterly profit in the year-to-year period ending in the third quarter of 2011. This was driven by demand for phones running on Verizon Wireless's market leading “4G LTE” network.

From the chart, we see that Verizon has modestly better margins than AT&T, and certainly better recent growth in profits. The negative point is that it pays a modestly lower dividend rate than its larger competitor. Both companies are struggling to maintain landline profits, and are relying on wireless for growth. Verizon is much better set up. Its 4G LTE network is already established throughout most major metropolitan areas, well ahead of the pace of AT&T. And 2012 will mark the first full year that Verizon will be able to sell Apple (NASDAQ:AAPL) products. Verizon has a much stronger reputation as a service provider than AT&T, which does not hurt in recruiting new subscribers. To catch up, T will have to continue its $20 plus billion annual capital spending campaign.

I see Verizon as a better choice than AT&T for all but those in need of immediate income. Verizon has more room for growth ahead of it. Not that it will double its price anytime soon, but steady growth and a generous dividend is a nice combination. Also, it stands to gain a $5.5 billion dollar cash infusion when Verizon Wireless makes a $10 billion dollar payment to its owners in early 2012.

Telephone Data Systems, Inc. (TDS)

TDS is a regional telecommunications company with operations in 36 states. Roughly 85% of its revenue comes from wireless, and the balance, from landline operations. It is the 82% owner of U.S. Cellular, Inc. (NYSE:USM), and USM accounts for the bulk of the consolidated company's assets and is driving the overall growth of TDS at this time. USM is the 8th largest cellphone operator in the U.S.

In its third quarter of 2011, despite TDS landline operation's essentially flat year-over-year performance, growth in USM's business was dynamic for the second consecutive quarter. Increased smartphone sales and higher monthly average revenue per customer, along with a creative loyalty rewards program, led to UMS operating income rising 66% year over year. This in turn led to EPS of the consolidated TDS rising 74% year over year, to $0.77 per share.

What AT&T has going for it is income and predictable safety. Things are quite the opposite with TDS. It is a growth company, with below-average dividend rates for the industry.

TDS was recently noticed by Mario Gabelli, who picked up 3.2 million shares of TDS in the third quarter of 2011. However, the mean analyst rating is a below average 3.0. TDS's balance sheet is acceptable with debt roughly twice the company's cash position. In the first quarter of this year, TDS raised its dividend for the 37th consecutive year, and its payout percentage for 2011 should be about 21%, giving the company ample room to continue dividend increases. Since 2008, a series of share repurchase plans has allowed the company to buy back nearly 15.4 million shares.

At its current valuation and a stated book value of about $37 per share, I believe TDS is a great speculative growth and income play.

MetroPCS Communications, Inc. (PCS)

PCS is a pure cellphone company, and specializes nearly exclusively on the prepaid market. It historically managed therefore to avoid some of the competitive pressures of AT&T and Verizon. PCS is the 7th largest cellphone operator in the country.

PCS is joining the industry in rolling out 4G LTE service. It is doing this more cheaply than its competitors, and has been acknowledged as a low cost leader in both service costs and hardware That, low cost and high technology, is a compelling combination.

As the chart above shows, despite rising revenue, PCS's profits disappointed. This is attributable to long-term capital investments in the 4G LTE network, and these costs are likely to remain high for several more quarters, at least. PCS has not paid dividends nor engaged in share buybacks, investing all its profits instead into its business. Its shares have fallen by some 20% in the past three months, so now would be a buying opportunity.

I see increasing competition from AT&T “Go Phone” plans, Wal-Mart, Inc's (NYSE:WMT) “straight talk plan,” among many other providers. Five years ago, PCS faced limited competition. That is not so today. I do not like the company, and despite some positive reviews of late, I would avoid the stock in favor of better established companies

America Movil, S.A.B. de C.V. (AMX)

AMX has nearly 250 million wireless subscribers spread across 17 countries. AMX is best known in this country for its TracFone subsidiary. AMX also controls 27 million landlines, and other smaller assets, at least compared with the wireless operation.

The attention of AMX management is undoubtedly focused on consolidating its recent $6.5 billion purchase of Telefonos de Mexico and $1.4 billion acquisition of Telmex International.

Despite the lackadaisical profit numbers for the third quarter of 2011, AMX is well positioned as the dominant wireless carrier in its markets. Its balance sheet is healthy, and control of the company is in the hands of Carlos Slim, described as the wealthiest person on earth. AMX also has a decades long, financial and business alliance with AT&T.

AMX has plenty of institutional support. Charles Brandes owns some 12.6 million shares, making AMX his largest holding. However, the mean recommendation from analysts is a bearish 2.6. I view AMX as a bet in favor of a growing middle class in central and South America. Since I know what is going on here and in Europe, more than what is going on to our south, I cannot endorse an investment in AMX, as better, and more local options exist in the telecommunications arena.

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