Many of the best "ten baggers" are found in obscure places. However, every now and then, there are stocks that are very intriguing, but should be avoided. Alaska Communications Systems Group (NASDAQ:ALSK) happens to be one of those stocks. Trading at only two times earnings, the stock looks cheap, but could prove to be a value trap.
Alaska Communications provides telephone, wireless, data, and Internet services in Alaska. The company remains the largest local telecommunications provider in the state. Alaska has remained the last frontier in a number of respects, including telecom, but things are changing. Much of the industry's wireline services are being replaced by wireless, and one major telecom company is looking to take the state by storm.
Alaska Communications offers wireless, right?
Landlines have been thrown by the wayside, and major telecom providers are feeling pressure from wireless operators. While Alaska Communications offers wireless, it's got some serious competition. Wireless service accounts for roughly 40% of Alaska Communications' revenue. Verizon (NYSE:VZ) is finally making a big push to bring 4G to Alaska.
As a result, during the second quarter, Alaska Communications' wireless subscribers declined 5% year-over-year. For the year ended June 2013, average revenue per user was down 3% year-over-year.
This comes after Verizon recently added nine new cell sites in Alaska, all part of its plan to bring LTE to the state. Its LTE network now covers 65% of Alaska. Verizon's 4G LTE in Rural America program has been taking Alaska by storm.
Verizon also has an agreement with Alaska Communications stipulating it will pay the company to use its networks when its customer are roaming. However, as Verizon increases its network coverage, these roaming charges will decline.
Another telecom opportunity to consider
Instead of risking your money with Alaska Communications, there are better ways to invest in the telecom industry. One such opportunity is Verizon. The company is boosting its Alaska exposure, and it recently bought out Vodafone for $130 billion, taking full control of Verizon Wireless. Despite the hefty price tag of the acquisition, it will be a long-term positive for the company.
There are also other companies in the telecom space that are worth avoiding. CenturyLink (NYSE:CTL) for example, is too heavily tied to the landline industry. Its dividend is questionable at best; despite a dividend yield of more than 6.5%, the payment is well in excess of 100% of earnings.
Last month, CenturyLink guided full-year 2013 earnings down, as the company continues to experience accelerating declines in low-bandwidth services. Now, the company expects 2014 revenue to come in below 2013. What's more, analysts expect the company to only grow EPS at an annualized 1.4% over the next five years.
While Alaska Communications appears very cheap on the surface, it's cheap for a reason. The company has an expected earnings growth rate that's well below its peers, and it also doesn't offer investors a dividend. Alaska Communications paid a dividend until late 2012, when it suspended dividends in hopes of improving its balance sheet, but its debt load still remains above peers.
Investors in the telecom market are better off considering companies that pay a dividend. Verizon gives investors impressive exposure to the wireless market, while also paying a 4.2% dividend yield. Stick with this company if you need some telecom exposure, and avoid taking a risk with Alaska Communications.
Marshall Hargrave has no position in any stocks mentioned. 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.