Verizon (VZ 0.92%) reigns supreme atop the U.S. wireless industry, with more than 116 million retail connections. Yet hard-charging contender T-Mobile (TMUS 0.81%) has upended the industry with its innovative "Un-carrier" promotions and is rapidly gaining share.
So which of these rivals -- champ or challenger -- is the better buy today?
Image source: Getty Images.
Financial fortitude
Let's first take a look at how Verizon and T-Mobile stack up in regards to financial strength.
|
Metric |
Verizon |
T-Mobile |
|---|---|---|
|
Revenue |
$126.03 billion |
$40.60 billion |
|
EBITDA |
$47.05 billion |
$10.69 billion |
|
Operating income |
$27.41 billion |
$4.89 billion |
|
Operating cash flow |
$25.31 billion |
$7.96 billion |
|
Free cash flow |
$7.48 billion |
($3.10 billion) |
|
Cash |
$2.08 billion |
$1.22 billion |
|
Debt |
$117.51 billion |
$30.91 billion |
Data sources: Morningstar, Yahoo! Finance.
Verizon is by far the more heavily indebted company. Yet it also has three times the revenue and five times the operating income as its smaller rival. Moreover, Verizon produced nearly $7.5 billion in free cash flow in the past year, while T-Mobile's capital spending continues to exceed its cash generation. So I'll give the edge to Verizon when it comes to financial fortitude.
Advantage: Verizon
Growth
Verizon may be the more financially powerful business, but T-Mobile has a clear edge in terms of growth. In fact, this better buy battle is particularly one-sided in regards to revenue and profit growth in recent years.
TMUS Revenue (TTM) data by YCharts
Wall Street expects this trend to continue. Analysts project that T-Mobile will grow its earnings per share by more than 28% annually over the next half-decade, fueled by new store openings, business account growth, and continued subscriber gains. Verizon, meanwhile, is forecast to increase its EPS by less than 6% annually during this same time, with challenges such as cord-cutting and pricing pressure from T-Mobile expected to weigh on its results. So, in terms of both recent past and expected future growth, T-Mobile is the clear leader.
Advantage: T-Mobile
Valuation
No better buy discussion should take place without a look at valuation. Let's now check out some key value metrics for these telecom rivals.
|
Metric |
Verizon |
T-Mobile |
|---|---|---|
|
Trailing P/E |
6.56 |
11.81 |
|
Forward P/E |
10.37 |
14.81 |
|
PEG |
1.78 |
0.66 |
Data source: Yahoo! Finance.
Verizon is the cheaper stock in terms of price-to-earnings ratio, with trailing and forward P/E ratios that are currently 44% and 30%, respectively, lower than that of T-Mobile. Yet T-Mobile is 63% less expensive on a PEG basis, which factors in its significantly higher expected EPS growth rates. Stock valuation should account for growth, so T-Mobile is the better bargain.
Advantage: T-Mobile
The better buy is...
Despite Verizon's superior cash flow generation, T-Mobile's greater growth prospects and more attractively valued shares make it the better long-term investment.
