In this article I take a look at AT&T (T) and Verizon (VZ) - the telecom service firms that may offer investors upside potential that outweighs the risks.
We'll use the management effectiveness ratios, book value-share, price-sales, price-book value, etc.. to evaluate AT&T and Verizon.
Additionally, macro-economic indicators are provided at the end of the article. As part of investment analysis, analysts should consider both the company fundamentals and the macro-economic landscape. The macro-economic picture in the U.S. is deteriorating. In Europe, the economy is currently contracting.
European officials are examining pro-economic growth policies that would reduce the sovereign risks the region is facing. Until pro-growth policies are implemented sovereign risks remain.
That said, diversified investors are compensated for bearing systemic risks.
Rating System
Buy - Be long
Neutral - No position
Sell - Be short
The ratings, research and analysis in this article should be considered as starting point for further research.
AT&T -- Neutral
Company v. Industry (TTM)
- Return on Assets: 1.63 v. 3.59
- Return on Investment: 1.86 v. 5.08
- Return on Equity: 3.80 v. 6.79
Based on the management effectiveness ratios, management is ineffective compared with its industry peers. Additionally, operating income-share is declining and the valuation metrics may be near peaks.
Total operating revenue increased compared with the year-ago quarter as wireless service revenue increased. Net income also increased compared with the year-ago quarter.
Current liabilities exceed current assets - a sign of illiquidity. AT&T is carrying almost $59B in long-term debt. The firm may be vulnerable to an increase in interest rates.
That said, earnings are high quality; although the firm doesn't generate enough cash from operating activity to cover financing and investing activity.
Skillful investors should examine shorting AT&T.
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Operating income-share declined; the operating income-share decline is considered bearish.
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Price-share is increasing; price-share may be near a peak and could decline in the coming months.
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Price-sales is increasing; price-sales may be near a peak and could decline in the coming months.
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Price-operating income is increasing; price-operating income may be near a peak and could decline in the coming months.
Verizon -- Neutral
Company v. Industry
- Return on Assets: 4.81 v. 3.59
- Return on Investment: 7.38 v. 5.08
- Return on Equity: 7.01 v. 6.79
Based on the management effectiveness ratios, management is effective compared with its industry peers. Additionally, book value-share is declining and the valuation metrics may be near peaks.
Total operating revenue increased compared with the year-ago quarter as net income also increased compared with the year-ago quarter.
Current liabilities is roughly equal to current assets, a sign of illiquidity. Verizon is carrying almost $48B in long-term debt. The firm may be vulnerable to an increase in interest rates.
That said, earnings are high quality; although the firm didn't generate enough cash from operating activity to cover financing and investing activity.
Skillful investors should examine shorting Verizon.
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Book value-share is declining; the decline in book value-share is considered bearish.
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Share price is rising and may be near an intermediate-term peak.
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Price-sales may be peaking; I expect price to declining in the coming months.
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Price-book value may be peaking; I expect price to declining in the coming months.
Macro Environment
ISM Non-manufacturing PMI is declining; the decline in non-manufacturing PMI is considered bearish. ISM non-manufacturing PMI should stabilize in the coming months.
The pace of job growth has slowed in recent months and may stabilize at low levels.
CB consumer confidence is increasing and may decline in the coming months. The Expectation Index and the Present Situation Index both declined, according to the latest report.
European Union services PMI is declining and should increase in the coming months.
European Union manufacturing PMI is declining and should increase in the coming months. A silver lining from the current release of the report is that the pace of decline in Italian manufacturing is slowing. Additionally, the depth of the contraction in manufacturing has yet to reach the depth of the contraction from the financial crisis in 2009.
Disclaimer: This article is not meant to establish or continue an investment advisory relationship. Before investing, readers should consult their financial adviser. Christopher Grosvenor does not know your financial situation and ability to bare risk and thus his opinions may not be suitable for all investors.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
