Telecom Wars: Which Carrier Is the Best Value?

Verizon, AT&T, Sprint, or T-Mobile: Which is the best investment?

Apr 29, 2014 at 1:45PM

For telecom companies, the addition of new subscribers is the ultimate indication of longevity, as consumers are typically locked into contracts. In this regard, Verizon (NYSE:VZ) always performs better than AT&T (NYSE:T), which is one reason that Verizon's stock gains have been nearly double that of AT&T over the last five years. Yet, with intense pricing competition from the likes of T-Mobile (NASDAQ:TMUS), along with the rise of Sprint (NYSE:S), this might be the first sign of Verizon's ending dominance, and a superior long-term investment.

AT&T wins, for once
Both Verizon and AT&T saw massive stock losses after reporting earnings, yet in looking at the reports, AT&T's quarter wasn't that bad. Specifically, its postpaid net additions (subscribers) totaled 625,000, which initially was seen as poor.

However, Verizon then reported its earnings, showing just 539,000 postpaid net additions, thus making AT&T's numbers look far superior. In other words, AT&T had 16% more new subscribers in the quarter. Granted, many of these came from tablets and were a result of promotional activities such as cheaper data plans. Nonetheless, AT&T was able to lure customers from the competition, gaining ground on Verizon's place as the top wireless provider.

A potentially larger problem
More than likely, AT&T's ability to outpace Verizon can be traced to the promotional activity noted. With that said, AT&T is not setting a trend by offering deals, but rather following the likes of T-Mobile in making its services more competitive, at least from a pricing point of view.

In March, T-Mobile announced plans to boost its monthly data plan from 500mg to 1GB to go along with unlimited voice and text, all for $50. While carriers have always packaged data differently, the new unlimited voice and text plans -- initiated by Sprint -- along with limited or no contract, are starting to appeal to consumers, especially with the way new phones are being launched.

In the past, AT&T and Verizon reigned as dominant carriers, but as networks have improved, Sprint and T-Mobile have both become very competitive in pricing. Sprint has the backing of Softbank and has soared from a stock price of $2 in 2012, and T-Mobile's double-digit growth has been one of the hottest acquisition tickets in the market for the better part of two years.

AT&T has fallen in place with the new pricing wars, especially with respect to data. However, Verizon has yet to play this game and continues to reiterate that it will maintain premium pricing. Verizon's CFO, Fran Shammo, has downplayed the impact of a wireless pricing war and recently said, "We're not going to buy customers."

However, in retrospect, Verizon's new additions for the quarter were not good, which has made many analysts and investors question if Verizon is executing the right strategy in this highly competitive market. In the initial months, that answer appears to be no for the country's largest network provider.

Don't get too high on Sprint or T-Mobile
Even if Verizon eventually follows the pack and cuts prices, and if it has several more weak quarters, this alone doesn't mean there isn't value in the space. Certainly, Verizon is the largest, but that doesn't mean it's also the best investment.

With that said, it's a tough stretch to call Sprint or T-Mobile a better investment than Verizon. For one, neither pay a dividend and both stocks have in large part been artificially inflated.

T-Mobile's stock has soared 75% in the last 12 months, and while its revenue has grown, its stock gains have been, in large part, due to continuous acquisition talks from both AT&T and Sprint. Furthermore, T-Mobile's move from contract phones in 2013 worked well initially, but if customers quit paying their bills minus a contract, the company is still left to pay the large bill of a mobile phone. Thus, there could be long-term liabilities.

For Sprint, it has rallied from $2 to a high of over $11 since late-2011. The company had an unlimited data plan, which at the time made it the only carrier to offer a set-priced plan for unlimited services. It also gained the iPhone prior to its large stock run, and was subsequently acquired by Softbank. However, the company has yet to post a quarterly profit and carries a high debt load. Therefore, at $7.57, Sprint has lost many of its competitive edges, which can be explained in the following article, "Does Sprint Still Have an Edge?"

Final thoughts
AT&T looks to be the best value. Not only did the company add more new subscribers in its last quarter compared to Verizon, but AT&T also pays a higher annual dividend of 5.3%. Furthermore, AT&T trades at just 10 times earnings versus an 11.6 times multiple for Verizon.

With that said, Verizon looks cheap as well, but given its last quarter, and the increased pricing competition, it appears as though the company will have to cut prices to thrive. If that day comes, Verizon looks especially solid, but until then, AT&T looks to be moving in the right direction and is particularly cheap.

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Brian Nichols owns shares of Verizon Communications. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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