It's A Numbers Game: Take AT&T Over Sprint, T-Mobile And Verizon

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About: AT&T Inc. (T), Includes: S, TMUS, VZ
by: Hale Stewart
Summary

Sprint has declining revenue and has posted a net loss in each of the last three years.  Their chart is unattractive.

While T-Mobile is growing, they don't pay a dividend and still need to tap the financing markets to fund operations.

AT&T and Verizon are very similar.  But T's higher dividend and faster growth rate make it the better company.

Securities Analysis by Graham and Dodd remains one of my all-time favorite investment books. While I have long given up on the “find a stock trading below book value and wait for the market to catch-up” strategy, I remain a fan of the book’s central idea that an investor can ascertain a great deal of information by tearing apart the company’s financials. “It’s a numbers game”columns are devoted to primarily using financial statements as a way to discern between competing companies.

There are four big U.S. cell phone companies: T-Mobile (TMUS), Sprint (S), Verizon (VZ) and AT&T (T). Below I explain why AT&T remains the most attractive of the four.

Here's my conclusion:

So, who's the winner? Sprint and T-Mobile are out. Sprint's stock chart says it all: the company is in desperate need of a restructuring. T-Mobile's topline revenue growth is attractive. But they still need financing for ongoing operations. And without a dividend, investors need solid capital appreciation, which their daily chart indicates might be an issue. Choosing between AT&T and Verizon is much harder. Both are growing and have sufficient capital to fund current operations. But AT&T's faster growth rate and higher dividend win the day.

Sprint

Sprint’s yearly chart is actually very attractive:

Whenever I see a chart like this, I immediately download the financials to see 1) why a company is trading at these levels, and 2) if there is a financial catalyst that could spark a rally. But the following table (which is an excerpt from their latest 10-K cash flow statement) shows Sprint is not financially attractive:

Sprint has posted a net loss for each of the last three years (top row). While not encouraging, it’s not the end of the analysis; plenty of companies have net losses yet still generate sufficient cash to fund operations. After adding and subtracting various items we find that for the last three years Sprint’s operations have been cash flow positive. But after subtracting the company’s two largest investments (network and leased devices), cash flow is once again negative. This means that financing has provided Sprint’s new cash for the last three years, which has resulted in total long-term debt increasing from 37% to 42% of total assets from 2016-2017. Interest payments as a percent of gross revenue are also increasing, totaling 5.94%, 6.78% and 7.48% in fiscal 2015, 2016, and 2017, respectively.

T-Mobile

T-Mobile's stock price is a bit more attractive:

From a technical perspective, I’d classify this as a “mostly sideways, moderate downtrend” issue. We’ve seen two rallies – one last spring and the current move higher – but also several sell-offs and a large amount of sideways movement.

Turning to the financials, T-Mobile (TMUS) has had solid revenue growth, with gross revenues rising (in millions) from $29,564 in 2014, $32,053 in 2015 and $37,242 in 2017. The company is also posting top-line revenue growth for the last 9 months. But their cash flow statement has the exact same problem as Sprint’s (from the company's latest 10-K):

While the company’s cash flow from operations is positive, their two largest investment expenses (purchases of equipment and spectrum) drain cash at a faster pace than the increase in earnings from operations, forcing the company to tap the financing markets to rebuild cash.

Both Sprint and T-Mobile are doing exactly what companies in their situation should be doing: using the debt markets as a way to fund on-going operations. This is an especially attractive option in the current interest rate environment when treasuries are trading at very low historical levels, forcing investors to reach for yield. Unfortunately, the good times never last. The credit markets will eventually tighten. While it’s very doubtful either company will be frozen out of the markets, investors will undoubtedly expect a higher interest rate from each, adding further financial pressure on both.

Finally, neither Spring nor T-Mobile pay a dividend, meaning investors must rely entirely on capital appreciation. For the last year, that has been noticeably absent with Sprint and only partially to T-Mobile investors.

Verizon and AT&T

Both companies pay healthy dividends: Verizon’s is 4.57% while AT&T’s is 5.54%. Verizon’s current payout ratio is 66% while AT&T’s is 91%, indicating that by traditional measures, each dividend is safe.

Let’s compare revenue growth and net income. This will help us determine if each can continue to not only pay their respective dividend but increase it.

(data from Morningstar.com)

Verizon’s numbers (lower three rows of the top section) show slow, steady growth. While not a barn-burning pace, this is very respectable for a company of their size. The three and five-year averages are very consistent. AT&Ts was weaker until 2015, when, thanks to the DirecTV purchase, their earnings accelerated noticeably. The bottom section compares net margins, which tells us how much of the company’s income could be sent to shareholders as a dividend. T had a better net margin until the 2012-2014 period, when VZ became a bit more efficient for shareholders.

Let’s now turn to VZs and T’s cash flow statements, or more importantly, their operating-investing numbers (these are the top two sections of the cash flow statement and show if the company needs to obtain financing for ongoing operations):

(data from T's and VZs 10-K). Unlike Sprint and T-Mobile, Verizon and AT&T are cash flow positive. T’s negative 2015 number was caused by their DirecTV acquisition, making it a one-time event. This means that for each, the financing markets are optional, not a necessity. This is a much better place to be in.

Finally, each is fine from a debt perspective. In the most recent 12-months, T’s total debt was 35% of the company’s assets while their EBITA was 8.87x interest payments. Those numbers for Verizon were 45% and 9.83x, respectively.

So, who's the winner? Sprint and T-Mobile are out. Sprint's stock chart says it all: the company is in desperate need of a restructuring. T-Mobile's topline revenue growth is attractive. But they still need financing for ongoing operations. And without a dividend, investors need solid capital appreciation, which their daily chart indicates might be an issue. Choosing between AT&T and Verizon is much harder. Both are growing and have sufficient capital to fund current operations. But AT&T's faster growth rate and higher dividend win the day.

This post is not an offer to buy or sell this security. It is also not specific investment advice for a recommendation for any specific person. Please see our disclaimer for additional information.

Disclosure: I am/we are long T. 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.