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Verizon (VZ) or AT&T (T): Which Telco is Better Positioned?

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Stocks in the telecommunication space had a dismal run in 2017. Intensifying competition in the wireless market and competitive threat from online streaming service providers acted as potential headwinds. The wireless market is almost saturated and spectrum crunch has become a major issue for the telcos.

Further, entry of cable MSOs (multi service operators) like Comcast and Charter Communications has made it all the more difficult. Moreover, high costs, regulatory hurdles and union issues are other headwinds.

Keeping aside all the adversities, telcos have bounced back with stellar fourth-quarter 2017 performances. Notably, all the major national wireless carriers have reported a massive gain of postpaid subscribers in the quarter. Despite cut-throat pricing competition in the industry resulting in unlimited data plans with several sweeteners, postpaid customer gain is a major positive. We believe this trend is likely to continue in 2018.

Moreover, the rising demand for technologically superior products has always been a silver lining for the telecommunication companies. Comprehensive tax cuts, impeding launch of the upcoming next-generation 5G wireless network, product differentiation and offering of bundled service-packages are the major catalysts that bode well for this space.

Given this backdrop, it is not a bad idea to undertake a comparative analysis of two major players in the telecommunication industry — Verizon Communications Inc. VZ and AT&T Inc. T based on certain parameters. Both fall under the broader Computer and Technology sector (one of the 16 Zacks sectors). At present, Verizon has a market capitalization of $213.52 billion, while that of AT&T stands at $231.69 billion.

Zacks Rank & Style Score

Currently, both the stocks carry a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

However, with an attractive VGM Score of B, AT&T enjoys an edge over Verizon, which has a VGM Score of C. Here V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of these three scores.

Price Performance

In the past four months, shares of AT&T have returned 4.9%, outperforming the industry’s rally of 1.5%. The stock has performed better than Verizon, which has returned 3.2% in the said time frame.

 

Valuation

We have tried to evaluate AT&T and Verizon in terms of terms of three metrics. Let’s take a look at them.

The trailing 12-month price-to-earnings (P/E - TTM) multiple for AT&T and Verizon are 11.9 and 12.7, respectively, while the industry’s is 14.3.

 

The trailing 12-month price-to-book (P/B) multiple for AT&T is 1.6, compared with 4.4 for Verizon. The industry’s P/B is 1.8.

 

Finally, the trailing 12-month price-to-sales (P/S) multiples for AT&T and Verizon are 1.4 and 1.5, respectively, compared with the industry’s 1.3.

 

Based on the above metrics, we find AT&T to be comparatively cheaper than Verizon.

ROE and ROC

Return on Capital (ROC) for Verizon and AT&T is 10.5% and 7.2%, respectively. While both the stocks have scored above the industry level of 7%, Verizon enjoys an edge over AT&T in this respect.

 

Return on Equity (ROE) is a measure of a company’s efficiency in utilizing shareholders’ funds. ROE for the trailing 12 months looks impressive for Verizon in comparison to AT&T. The current ROE for Verizon is 49% while that for AT&T is 14.5% compared with the industry’s ROE of 17%. 

 

Dividend Yield

Verizon’s dividend yield over past year has been 4.95%, higher than the industry’s figure of 4.65%. With a dividend yield of 5.50%, AT&T shareholders earn significantly higher dividend yield than Verizon as well as the industry.

 

Earnings Surprise History and ESP

In terms of earnings history, Verizon’s earnings lagged the Zacks Consensus Estimate in two of the previous four quarters, resulting in an average miss of 1.3%. However, AT&T has delivered positive surprise in two of the prior four quarters with an average beat of 6.4%.

The situation remains same when considering Earnings ESP values for the current quarter. While Verizon’s Earnings ESP is -0.15%, AT&T’s stands at +1.86%.

Earnings Estimate Revisions

Based on current-quarter earnings estimate revisions in the last 30 days, AT&T appears to be more favorably placed. Though estimates for both Verizon and AT&T rose over the said time frame, AT&T   has an edge over Verizon.

For Verizon, the Zacks Consensus Estimate for first-quarter 2018 earnings increased 0.9% to $1.12 per share. The same for AT&T increased 1.2% to 87 cents per share.  

For full-year 2018, estimates have been stagnant at $4.52 for Verizon while the same has gone up 1.8% to $3.48 for AT&T.

Sales Estimates

We expect first-quarter 2018 revenue growth of 4.7% for Verizon, which is significantly higher than 0.2% for AT&T.

The picture is quite similar for full-year 2018. We project 1.9% revenue growth for Verizon, better than AT&T’s loss of 0.1%.

Bottom Line

Our comparative analysis shows that AT&T scores over Verizon in terms of valuation, style score, price performance, dividend yield, earnings history, Earnings ESP and earnings estimate trends. Verizon enjoys an advantage only in terms of return on capital and equity and sales estimate trends.

Both the companies are two of the nation’s major wireless carriers. They look strong on the back of their wireless opportunities in the industry – which is in a state of transition to the next-generation 5G network.

Key Picks

Some better-ranked stocks in the broader Computer and Technology sectorinclude United States Cellular USM, Harris Corporation HRS and Intel Corporation INTC. While United States Cellular sports a Zacks Rank #1 (Strong Buy), Harris and Intel carry a Zacks Rank of #2 (Buy).

The projected earnings growth rate (3-5 years) for United States Cellular, Harris and Intel are 1%, 6% and 8.4%, respectively.

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