Which Wireless Stock Should You Add to Your Portfolio?
Marie is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The wireless industry was in the news quite a bit in recent weeks. From Softbank’s acquisition of Sprint (NYSE: S) to AT&T’s (NYSE: T) purchase of Leap Wireless (NASDAQ: LEAP) and Verizon’s (NYSE: VZ) iPhone woes, the industry is busy. Big wireless firms are getting bigger, and the Federal Communications Commission (FCC) continues to worry about a heavily-concentrated wireless industry.
Amidst all of the commotion, which company has the most upside? Let’s take a look and find out.
With 37.2% of the US mobile market, it may seem difficult to bet against Verizon. The US’s largest carrier has been successful while marketing both Androids and iPhones. With income growth of 3.5% in 2012, Verizon continues to impress. Even so, recent news of a purchase agreement with Apple put a cloud of uncertainty over Verizon.
When Verizon began selling the iPhone in 2010, many wondered what the company paid Apple for the right to market the hot device. According to Moffett Research, Verizon entered into a $45 billion purchase agreement. To fulfill its part of the deal, Moffett says Verizon is obligated to sell $23.5 billion worth of iPhones this year, double what the firm sold last year. If Verizon doesn’t make the sales, Moffett says that the company is on the hook for $14 billion. $14 billion is a large chunk of change considering that Verizon’s net income was just $10.5 billion in 2012.
Although it’s unlikely that Verizon will have to cover the entire $14 billion, I don’t like the uncertainty. Verizon has a dark cloud hanging over its head, and the firm needs to deal with it. The cloud could break up, or the rain could come pouring down.
AT&T isn’t playing games. Last week, the US’s second largest carrier – with 27.9% of the market – bought smaller rival Leap Wireless for a mere $1.2 billion in cash. AT&T CEO Randall Stephenson was unable to buy T-Mobile in 2011, but the FCC approved his latest acquisition bid.
Leap offers largely prepaid services, and Stephenson said the acquisition would “jumpstart” AT&T’s own prepaid, month-to-month segment. Leap will add its five million subscribers to AT&T’s 107 million, a 4.7% increase for AT&T. More importantly, however, the deal gives AT&T valuable wireless spectrum. Leap owns spectrum in large cities, which are densely populated with little spectrum to go around. Some analysts say that the merger was purely a spectrum play for AT&T, which is plausible considering that AT&T’s spectrum position is worse than that of Verizon or Sprint.
Leap will improve AT&T’s position in the wireless market, but I don’t think the relatively small deal will have an enormous effect on AT&T’s stock price. Still, I think the potential downside is low, which makes AT&T a safer investment than Verizon right now.
Though Sprint doesn’t own the market share that AT&T and Verizon do (only 12.3%), I think the third player in the US mobile industry has more upside than either of its more prominent competitors for a couple of reasons.
First, Sprint was recently acquired by Japanese telecommunications giant SoftBank. As I outlined in a previous post, Sprint needed Softbank; the $5 billion cash infusion that Softbank provided is already starting to pay off. The acquisition allowed Sprint to win the heated battle with Dish Network for Clearwire, a wireless company that holds large portions of the new LTE spectrum. Some now argue that Sprint is the new “Spectrum King” in the telecommunications industry.
Second, Sprint has an advantage in its unlimited data plan. Verizon and AT&T long ago stopped offering plans with unlimited text, talk, and data, but Sprint refuses to pull the rug out from under its consumers. Sprint is now increasing its competitive advantage by slashing the price of the plan by 27%, from $110 to $80 per month. For comparison, Verizon and AT&T offer plans with limited data but unlimited talk and text for $90 and $85 respectively.
Sprint CEO Dan Hesse is making the right moves. Since he took the helm in 2007, Hesse relentlessly worked to turn the company around. Now, his hard work is paying off. The Softbank acquisition was his chief goal, and I think the deal is the turning point for Sprint.
Of the three players, I would go long with Sprint. The company is in the midst of a turnaround, and it's trading below $7. Will Sprint reach the $30's or $50's like AT&T and Verizon? No way, but Sprint doesn’t have to go that high in order to be a sound investment.
AT&T and Verizon are solid companies. They have sustainable business models and ample market share. Still, both have price-to-earnings ratios that are higher than the industry average, and I think that both (but especially Verizon) are overvalued.
This article was written by Randy Holcombe and edited by Chris Marasco. Chris Marasco is Head Editor of ADifferentAngle. Neither has a 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!