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Alexander Grano
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I am a intermediate investor with 3 years of trading experience with both Stocks and Mutual Funds. I primarily focus on long term investments that have strong potential to grow overtime.
  • ATT Vs. Verizon- The Wireless Wars 0 comments
    Feb 28, 2013 5:23 PM | about stocks: CTL, FTR, S, VOD, VZ, WIN, T

    With more and more consumers cutting their land lines and replacing them with their mobile devices, a choice for every mobile consumer needs to be made. Which wireless network provider to pick? In the U.S.A. there are four primary networks, AT&T (NYSE:T), Verizon (NYSE:VZ), Sprint (NYSE:S), or T-Mobile. For most consumers that list is narrows down to only two choices, AT&T or Verizon. Just as consumers choose which carrier to use, investors also need to decide who will ultimately come out on top of this ongoing wireless battle.

    I have been a long time follower of both AT&T and Verizon on my daily stock watch ticker. Recently I have been giving some serious thought into buying one of these companies and begin building a position within my portfolio. There are a few obvious differences in these two companies, but there are also a lot of similarities. When it comes to putting up my own capital to acquire one of these stocks I (like most careful investors) would prefer to invest in the company that presents the better value and ultimate deal. In trying to determine the better stock I want to put both firms' fundamentals and overall performance under the microscope in hopes of seeing a clear winner.

    AT&T is a massive company that provides telecommunications services to consumers, businesses, and other providers on global scale. The company has been around for years and is one of this country's largest wireless providers with an estimated 100 million wireless subscribers. AT&T has a market capitalization of $199.35 Billion and a P/E of 29.43. The stock currently trades for around $35.81 per share and is still a great buy. AT&T in 2012 generated $127.43 Billion in revenue which translated to $7.62 Billion in net income to the company. The company also has $9.45 Billion in cash and long term investments and a total book value of $16.54 per share. One of the most attractive aspects of owning AT&T is its dividend yield, currently at $1.80 per share or 5.07%. AT&T has also had a long history of regularly increasing its dividend each year, which makes this company very attractive and presents tremendous value for longer term investors.

    From a wireless perspective, AT&T claims to have the largest 4G LTE (4th Generation) coverage in the U.S., but its coverage is more isolated in larger metropolitan areas. AT&T has been actively involved in trying to expand its network, which it has done through a number of acquisitions and improvements in its current network over the past several years. More recently AT&T received FCC approval to acquire NextWave Wireless and Atlantic Tele-Network. The firm intends to use these acquisitions to further expand upon its 4G LTE capacity, currently in 135 cities. Due to AT&T's size it is hard for the company to easily grow organically, which forces the firm to divert its efforts on acquisition of smaller firms. As time goes on this continued growth through acquisition could face obstacles with the FCC. It wasn't that long ago when AT&T tried to acquire T-Mobile for $39 billion and 33.7 million subscribers which would have made AT&T the country's largest wireless provider. Ultimately the FCC blocked the transaction for fear that AT&T would control roughly 43% of the mobile phone market.

    From an operations standpoint, AT&T also faces some ongoing pressures to its financials. The two main impacts are from pension obligations and high phone costs. In its most recent earnings release the company took a hit of $10 Billion or $1.79 per share as a resultv of higher than expected pension obligations. AT&T continues to subsidize smart phones for its consumers who sign up for 2+ year contracts.

    Even though AT&T may have its fair share of operational problems the company is still very generous to its shareholders. In addition to the lofty 5% yield the stock currently has, the company also has a very good practice about buying back shares of the company on a regular basis, a move which only increases shareholder value. In fact, just this past August the company announced that it planned to buy back 300 million shares, which represents roughly 5% of AT&T's outstanting shares

    Verizon is the other massive telecommunications company in the U.S. Verizon originally was Bell Atlantic Corporation until the firm changed its name back in 2000. Verizon serves roughly 94.2 million retail customers. The company has a market capitalization of $130.91 Billion and a P/E of 148.40. The stock currently trades for around $45.85 per share. Verizon in 2012 generated $115.85 Billion in revenue which translated to $875 Million in net income. Verizon currently has $6.96 Billion in cash and long term investments and a book value of $11.60 per share. Similar to AT&T, Verizon also has a large dividend of $2.06 per share or 4.50%.

    Verizon in its early years made the decision focus on growing and expanding its the wireless portion of its product line. That strategy has continued to pay off. Verizon unlike AT&T has the ability to service not only customers in larger metropolitan areas, but also customers in the more rural and remote areas of the country. Verizon's fourth generation network, 4G LTE is currently active in 476 cities. In its Q4 earnings announcement the company mentioned that it had grown service revenues by almost 8.5% and 2.1 million in retail postpaid connections.

    Even with a strong wireless network Verizon too continues to further expand its balance sheet through acquisition. Its most recent acquisition was HUGHES Telematics. Verizon is hopeful that it can use this acquisition to further expand upon its involvement in the delivery of advanced automotive and fleet telematics and machine-to-machine services.

    Verizon Wireless, similar to AT&T, also has some operational problems that plague it, mainly from high pension costs and the fact that UK based Vodaphone (NASDAQ:VOD) owns 45% of the company, while Verizon owns the remaining 55%. Pension obligations cost Verizon this past quarter $4.43 Billion or $1.55 per share. Even amongst these headwinds Verizon continues to offer a very nice dividend yield and the company plans to continue its share buyback program by buying back 100 million shares or 3.6% of the total float amount.

    The below chart highlights some of the key metrics from each company and compares them to each other.

     

    VZ

    T

    2012 Net Income

    $875 M

    $7.26 B

    Market Capitalization

    $131 B

    $198 B

    P/E

    149

    28.46

    Beta

    0.35

    0.38

    Current EPS

    0.31

    1.25

    Dividend Yield

    4.50

    5.07%

    Share Buy-Back Amount

    100 M

    600 M

    Cities with 4G LTE

    476

    135

    Price/Book

    3.94

    2.13

    Profit Margin

    0.76%

    5.70%

    Return on Equity

    12.32%

    7.60%

    Looking at the above chart AT&T is the clear cut winner. AT&T has a stronger cash position, P/E, EPS, dividend, and buyback program. I will agree that Verizon has a more diverse network in more cities of all sizes, but AT&T has a morer reliable network and far better customer service. Additionally, as a shareholder of AT&T you are buying 100% of AT&T stock. On the converse with Verizon, you are only buying 55% of Verizon since Vodaphone still owns 45% of the company. Additionally, from a fundamental standpoint AT&T presents a better price to book value and has higher profit margins. 4G LTE coverage and return on equity these are the only two areas where Verizon outpaces AT&T.

    In either event both AT&T and Verizon will eventually be the main mobile carriers for all consumers and the age of landlines is slowly but surely ending. For shareholders of Frontier Communications (NASDAQ:FTR), Windstream Corporation (NASDAQ:WIN), or CenturyLink (NYSE:CTL) these stocks have continued to sell off and are now presenting true value traps. Regardless of which mobile carrier's stock looks more attractive in the chart above I would strongly suggest selling those old land line stocks and upgrading to a mobile play, preferably AT&T.

    Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in T over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

    Themes: long-ideas Stocks: CTL, FTR, S, VOD, VZ, WIN, T
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