The Dow Jones Industrial Average (DJINDICES:^DJI) was slightly lower at 1 p.m. EDT Tuesday, following a morning of mostly flat trading. The Dow opened slightly lower but moved back and forth between gains and losses throughout the session.
Sprint (NYSE:S) outperformed the broad markets by a wide margin Tuesday morning, moving nearly 2% higher before falling back to a roughly 1% gain. Sprint's major competitors, Verizon (NYSE:VZ) and AT&T (NYSE:T), were both slightly under breakeven in the session.
Why Sprint popped but Verizon and AT&T didn't
An analyst at the investment bank Macquarie Group upgraded Sprint's stock on Tuesday morning. This announcement was the single catalyst that drove the company's stock higher today.
Macquarie said it sees a 70% likelihood that a Sprint merger with rival T-Mobile would survive regulatory scrutiny and gain approval.
Verizon and AT&T dominate the U.S. wireless business, and Sprint and T-Mobile have struggled to gain market share against the two giants. The merger of Sprint and T-Mobile would create a company with enough size and scale to finally challenge the top players.
The investment perspective
In theory, a third competitor at scale would increase competition, choice, and service quality for consumers. For investors, though, the outcome is not as clear.
AT&T and Verizon are the two highest-yielding dividend stocks on the Dow, made possible by the companies' slow and consistent growth, predictable profits, and excellent cash flows. It is truly impressive that these companies can maintain dividends considering the massive amounts of capital it takes to build and maintain their respective nationwide infrastructure networks.
The prospect of a third major domestic competitor is problematic, at least on the surface, for both of these giants. The industry has been in a pricing war for several months now, and T-Mobile by many accounts is winning. It stands to reason that a merged T-Mobile-Sprint would continue that trend, and steadily gain market share from the big boys while also eroding margins.
Don't forget the international competitors. China Mobile is the largest company in the industry with over 750 million current subscribers -- that's three times as many as AT&T and Verizon combined. You can read further about the international threat here.
Only time will tell if Verizon and AT&T can continue to thrive in a new world of three major U.S. players. Warren Buffett is buying Verizon, if that is any indication.
What about Sprint?
The case for Sprint is more speculative. The business hasn't turned a profit in years, and T-Mobile by most accounts is the best of the "not Verizon or AT&T" telecoms.
In its report this morning, Macquarie summed up the proposition succinctly in terms of risk and reward:
With 53% upside to $13.20 by end-'15 if a deal is approved vs. 17% downside to $7.25 if rejected, S shares are now the best risk/reward in US telecom.
Sprint today is trading at just over $8.80.