Best Buy: Verizon, Sprint, or AT&T

Verizon (VZ -0.53%), Sprint (S), and AT&T (T 1.88%) are three of the big names in the U.S. wireless industry. In recent years, Sprint has been putting pressure on the economics of the two giants -- Verizon and AT&T -- in the form of aggressive pricing and other competitive moves like early adoption of equipment installment plans and smartphone leases. What's more, while AT&T and Verizon are investing in areas outside of their core wireless businesses, Sprint is focused exclusively on wireless.

Investors may be wondering whether Sprint makes a better buy than a stalwart like AT&T or Verizon. Or if Verizon and AT&T are better positioned, which of them is best among the three wireless carriers. Let's examine each one a bit more closely to determine which stock is the best buy.

Image source: Verizon.

Is Verizon's premium position slipping away?

Sprint is a big fan of pointing out that the gap between its network coverage and Verizon's has gotten much narrower in recent years. That said, Verizon still consistently earns the highest grades in third-party network quality tests.

But even its strong network hasn't stopped it from feeling pricing pressure. It saw 11 straight quarters of declining service revenue before things started turning around last quarter. It was practically forced to start offering an unlimited data plan. Then it quickly moved to offering two tiers of unlimited data to help control its cost of services and compete on price.

All of its efforts have paid off. In the first two full quarters since introducing its unlimited plan, Verizon has added over 200,000 postpaid phone subscribers after several quarters of disappointing net additions (and losses). Service revenue is starting to turn around, as management forecast, and subscriber churn levels remain the lowest in the industry.

Verizon has taken steps to expand beyond wireless with its digital media business, Oath. It also has a wireline business providing internet, video, and landline service. Still, it hasn't resorted to measures as drastic as AT&T, which has made big acquisitions in the form of DirecTV and Time Warner in recent years. It's still strapped with a boatload of debt from its buyout of a minority stake in Verizon Wireless in 2014.

Image source: Sprint.

Sprint is doing everything it can to win over customers

With a wireless network that consistently ranks at the bottom of third-party measurement surveys, Sprint has resorted to aggressive pricing to win over customers. This summer, for example, it started offering free service to new customers, particularly targeting Verizon subscribers.

For its efforts, Sprint has started to see new customers come on board. The company's share of gross subscriber additions reached an all-time high last quarter, according to management. Its 367,000 net postpaid phone subscriber additions still fall short of Verizon's, though. What's more, unlike Verizon or AT&T, Sprint is losing postpaid connected device subscribers.

Sprint's aggressive pricing is also putting pressure on its service revenue. Through the first half of fiscal 2018, postpaid service revenue is down 7%. That's worse than Verizon, which has notably struggled to sustain its service revenue.

Image source: AT&T.

AT&T is using the bundle as best it can

AT&T's acquisition of DirecTV and its pending acquisition of Time Warner have put it in a position to offer an aggressively priced entertainment bundle with its wireless service. Unlimited plan subscribers get free HBO and $25 off one of AT&T's video services.

The plan hasn't stopped it from losing postpaid phone subscribers, which declined another 97,000 last quarter. Overall, service revenue fell 2.8% year over year last quarter, and average revenue per postpaid subscriber fell 3.5%.

Meanwhile, AT&T is bleeding video subscribers as well. The company lost 89,000 video subscribers, with nearly 300,000 U-Verse and DirecTV subscribers replaced by DirecTV Now subscribers -- AT&T's streaming video service. That said, AT&T's been able to continue raising prices for its linear TV services to maintain slight revenue growth.

Which is the best buy?

Sprint doesn't have a competitive advantage beyond lower pricing. If the company continues to rely on undercutting AT&T and Verizon to win customers, it will be difficult for it to generate enough cashflow to build out its network and provide a more competitive service. It's currently about break-even on a free-cash-flow basis.

Comparatively, Verizon and AT&T are cash-flow giants. Verizon generated $4.7 billion in free cash flow over the trailing 12 months, and AT&T produced $16.5 billion. Verizon's free cash flow was negatively impacted by a $3.2 billion tax bill on the sale of some of its wireline assets and the decision to shift to an asset-backed bond to pull forward revenue from its equipment installment plans. Adjusting for those factors, Verizon's cash flow is comparable to AT&T's.

The free cash flows of Verizon and AT&T support big dividend yields of 4.8% and 5.8%, respectively.

Perhaps the best valuation metric for comparing the wireless carriers is EV to EBITDA. Here's how the three stack up.

Table source: Yahoo! Finance.

Investors should note that Sprint's EBITDA is comparably higher due to the fact that it uses device leasing. Instead of expensing devices, Sprint capitalizes them and then amortizes them over time. This results in a higher EBITDA than if devices showed up in cost of goods sold, like they do with Verizon and AT&T. As such, Sprint's lower EV-to-EBITDA multiple isn't very impressive.

Verizon is actually growing its subscriber base and isn't bogged down with a declining pay-TV business. As such, it deserves a slight premium to AT&T. On the other hand, AT&T offers a higher dividend yield, supported by massive free cash flow.

For investors looking for more exposure to the U.S. wireless industry, Verizon is the best buy. If you're comfortable with lots of exposure to the declining pay-TV market, AT&T presents better value. I'd stay away from Sprint, though.