Telecom's Big Drop Presents Buying Opportunity

Verizon and AT&T have been a drag on the Dow Jones Industrial Average recently but that presents an opportunity for investors.

Travis Hoium
Travis Hoium
Apr 24, 2014 at 3:30PM
Markets

The Dow Jones Industrial Average (DJINDICES:^DJI) fell flat today and is lagging other indexes that are benefiting from Apple's sharp rise today. On an economic front, new unemployment claims rise to 329,000, but durable goods orders were up 2.6%, so the signals were mixed.

One of the biggest reasons the Dow went nowhere today was another decline by its two big telecom companies, Verizon Communications (NYSE:VZ) and AT&T (NYSE:T), which can't seem to impress investors with their results.

Verizon Wireless stores like this one weren't as busy as investors expected in the first quarter.

Why Verizon and AT&T are dragging down the Dow
It seems that wireless giants Verizon and AT&T are in a no-win situation these days. If they lower prices to compete in an escalating price war, they're sacrificing margins for growth, and if they don't cut prices, they're giving up growth to hold high-margin customers.

Thus far, AT&T has been participating in the price war and won the battle for subscribers in the first quarter. But as you can see below, Verizon Wireless is winning the profitability battle and giving up new subscribers to do so.

Metric

Verizon Wireless

AT&T

Wireless subscriber additions

549,000

>1 million

Wireless operating income

$7.3 billion 

$5 billion 

Wireless operating margin

35%

28.2%

Source: Company earnings releases.

Today, investors are disappointed in the growth Verizon delivered and the $0.84 per share in adjusted earnings it reported was $0.03 below estimates. This follows AT&T's report earlier this week that showed strong growth on the top and bottom line but didn't come with increased guidance.

When you take a step back and look at both of these businesses, it's hard to find too many flaws, whether there's a price war or not. Verizon and AT&T are both trading at 13 times this year's estimates, and they pay 4.4% and 5.1% dividend yields, respectively. And let's not forget that they grew revenue 4.8% and 3.6%, respectively, last quarter.

These are far from dying businesses, and with a wide network lead over the competition, they're both in great position for the long haul. The market may be selling off today, but I think this is a great buying opportunity for investors willing to buy and hold for the long haul. The wireless business as a whole is only growing, and these companies will continue leading the way.