Over the past six months, as shown by the chart below, shares of the major U.S. telecommunications companies, AT&T (T), and Verizon (VZ) have all moved higher. However, shares of the world's largest telecommunications company, China Mobile Ltd (CHL), are roughly unchanged over the past six months. Investors should take advantage of the divergence between China Mobile and the major U.S. telecommunications plays to take profits on the U.S. companies and buy China Mobile.
Net Debt vs. Net Cash
Verizon: $41.5 billion net debt
AT&T: $62.3 billion net debt
China Mobile: $58.1 billion net cash
Clearly, China Mobile is in a far superior financial position to both AT&T and Verizon. China Mobile can use its cash in a variety of ways going forward to benefit shareholders. China Mobile could use its cash to buy other companies; China Mobile could use its cash to increase its dividend; China Mobile could buy back its own stock. China Mobile's financial position means that it is not reliant on the capital markets for financing in the way that Verizon and AT&T are. Due to their debt loads, Verizon and AT&T are highly exposed to a potential, and likely inevitable, increase in interest rates. China Mobile would hardly be impacted by rising interest rates. In summary, China Mobile's financial position gives it major advantages over AT&T and Verizon.
On Monday, Sprint (S) announced a $20 billion deal with Japanese telecommunications company Softbank. This deal is a negative for AT&T and Verizon as Sprint now has the financial backing to compete with Verizon and AT&T. Previously, AT&T and Verizon, due in part to their superior financial position, had significant advantages over Sprint. Verizon and AT&T were able to invest more heavily in their network and retail sales divisions. This competitive advantage has allowed Verizon and AT&T to form what many refer to as a "duopoly" on the U.S. wireless market. Going forward, with the backing of Softbank, Sprint is poised to become more competitive with AT&T and Verizon leading to a potential reduction in profit margins.
China vs US
China Mobile is exposed to the Chinese economy while Verizon and AT&T are exposed to the U.S. economy. While the Chinese economy is certainly going through a difficult time, it is still growing much faster than the U.S. economy. Long term growth prospects are better for China Mobile than Verizon or AT&T.
Verizon and AT&T have already benefited, to a large extent, from Apple's (AAPL) iPhone. Contrastingly, China Mobile has not yet reached a deal with Apple to carry the iPhone. Reports have indicated that it has been China Mobile, not Apple, that has been preventing a deal. Eventually, a deal will be reached between Apple and China Mobile, and likely on favorable terms for China Mobile, as Apple needs China Mobile's customer base if it hopes to take hold of the smart phone market in China in the same way Apple's iPhone has taken hold in the U.S. As discussed here, a deal to carry the iPhone would be a major positive for China Mobile shares. The iPhone catalyst for Verizon and AT&T has, to a large extent, already played out.
As shown by the chart below, the spread between the dividend yields offered by AT&T and Verizon compared to China Mobile has narrowed significantly. I think eventually, China Mobile will, after future dividend increases, be higher yielding than AT&T or Verizon.
Given China Mobile's superior financial position, exposure to China, and potential upside from an iPhone deal, one would expect that China Mobile trades at a higher earnings multiple than Verizon or AT&T. However, this is not the case. AT&T trades at 46 times trailing earnings while Verizon trades at 44.5 times trailing earnings. Using forward estimates, AT&T trades at 13.6 times earnings while Verizon trades at 15.7 times earnings. Comparably, China Mobile is currently trading at just 10.9 times earnings.
Investors should sell Verizon or AT&T and buy China Mobile.