Sprint And AT&T: Which Is The Real Long-Term Winner?

|
Includes: S, T
by: Spencer Knight

It is often overlooked that investing in a company's stock is different than investing in the respective company, and vice versa. In other words, it is often times forgotten that a company's stock does not directly correlate with the performance of the company.

This conundrum gives investors problems day in and day out. Investors face this challenge when deciding to invest in Verizon (NYSE:VZ), AT&T (NYSE:T) or Sprint (NYSE:S). Each company is at a critical point of the spectrum. Verizon is at the upper limits of the company's valuation, AT&T is toward the middle-top of the company's valuation, and Sprint is at the lower end of that spectrum. Also, Verizon and AT&T's operations are currently more efficient than Sprint's.

With that in mind, I will discuss which company, Sprint or AT&T, is a better long term play. I will begin by comparing Sprint and AT&T's revenue, operating income, and net profit margin to detect any patterns in the efficiency of each company's operations. From there I will discuss recent share price events and explain what investors should expect moving forward.

It is important to note that when analyzing revenue, operating income and net profit margin we are looking for increases across the board. Increased revenue indicates an increase in customers and sales. Increased operating income indicates a number of things: 1) It can indicate increased revenue and constant operating costs, 2) it can indicate lower operating costs and constant revenue, or 3) a combination of one and two. Lastly, an increase in net profit margin indicates how efficient the company is with every dollar of revenue.

Now with the mechanics out of the way, we can begin dissecting Sprint and AT&T. Over the past five quarters, Sprint has gradually increased revenue by about $181 million. AT&T has essentially seen revenue stagnate. Both companies, however, have improved net profit margin over this time frame. Sprint's net profit margin has increase 510 basis points (bp) over the past five quarters while AT&T's has improved 206bp. A big part of Sprint's net profit margin improvement is from the company producing positive operating income beginning in the first quarter of 2011.

Sprint
Q3 2011 Q2 2011 Q1 2011 Q4 2010 Q3 2010
Revenue $8.333B $8.311B $8.313B $8.301B $8.152B
Operating

Income

$208M $79M $259M -$139M -$213M
Net Profit

Margin

2.5% 0.95% 3.1% -1.7% -2.6%
Click to enlarge
AT&T
Q3 2011 Q2 2011 Q1 2011 Q4 2010 Q3 2010
Revenue $31.48B $31.49B $31.25B $31.36B $31.58B
Operating

Income

$6.23B $6.16B $5.81B $2.09B $5.43B
Net Profit

Margin

19.8% 19.6% 18.6% 6.66% 17.2%
Click to enlarge

One of the more important aspects of the two tables above is the difference in net profit margin. While it may appear AT&T is the superior company, there is more than meets the eye. It is clear AT&T is currently very stable, but Sprint is improving at rates that make the stock a compelling long term option.

Sprint's net profit margin has increased almost two fold compared to AT&T. Therefore as Sprint continues to improve revenue and overall operations the company will improve by leaps and bounds. On the other hand, AT&T will find it difficult to streamline the company's operations further. Also, by viewing each company's annual net profit margin since 2007, we see a similar trend. Since 2007, AT&T's margins have decreased through 2010. However, barring a disastrous fourth quarter, AT&T should see higher margins for 2011.

Click to enlarge

Click to enlarge

Comparatively, Sprint has increased the company's efficiency substantially. Sprint has gone from a loss of $28.74 billion in operating income in 2007 to what should be positive income between $500-$1,000 million in 2011. Investors should not expect the same improvement over the next four years, however we will see Sprint continue to streamline operations while bringing in more revenue.

Sprint and AT&T will continue to improve operations and slowly increase revenue. I say slowly because both companies have reached a level where substantial revenue growth will not occur. But over time we will see revenue increase. Combine this with improved operations from both companies and we should see each share price move higher.

Before moving forward with each respective share price, it is important to discuss the past five to six months. During this time frame, Sprint's stock has continued to slide while AT&T's has climbed back to pre Summer 2011 levels. Therefore Sprint's stock is a better speculative play in the near term. I say this because Sprint's share price has tremendous upside while AT&T will need strong news and earnings to keep the share price moving higher.

Click to enlarge

Click to enlarge

Moving forward from here investors will see AT&T's share price move higher despite the loss of the T-Mobile deal. AT&T's share price is a safer place for investor money because the company is strong in the present, compared to Sprint which is focusing on the long term. With that said, it is important to note Sprint's stock has a good chance of surging higher after the company gives an update of operations and long-term goals at the next conference call, assuming any update is for the greater good of the company.

Both companies will improve operations in the long term, but because Sprint's stock has been kicked down so hard the opportunities for investors far outnumber the opportunities in AT&T. But with more opportunities comes greater risk. Therefore AT&T is a better choice for shorter term investors who are risk averse, while Sprint is more preferable for ultra long-term buy and hold investors who are not afraid of shorter term risk.

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