Sprinting to Glory
Cecil is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The market experienced substantial increases for a few telecom related companies yesterday. I’m naturally talking about Sprint (NYSE: S) and Clearwire (NASDAQ: CLWR). Meanwhile, pioneers in the sector, AT&T (NYSE: T) and Verizon (NYSE: VZ) ended in the red. Shares of Sprint were up by 14% to $5.76 and shares of Clearwire increased by nearly 50%. This is pretty significant when you consider that Sprint has not traded above the $6 mark since June of last year.
So what happened yesterday that caused these companies to increase? Sprint confirmed that it is in talks with Softbank, Japan’s third largest wireless carrier. In a statement, the company said the discussions involve “a potential substantial investment by Softbank in Sprint.” The company went on further to say that it does not intend to comment unless and until an agreement is reached. You’d think it was too late for that.
One of the key components of the deal is the 49% stake that Sprint owns in Clearwire, the broadband company that is rolling out new high-speed LTE networks across the US. It plans to have about 5000 LTE towers operational across the US by 2013 but was struggling to execute, one of the reasons for the exit by Time-Warner earlier.
However, the company owns a chunk of LTE spectrum, which it plans to develop using a technology known as TDD-LTE, a technology that has not yet gained momentum in the USA, but is quite popular in other markets including Japan. Therefore Softbank’s purchase of Clearwire seems to make logical sense and is considered a key ingredient in Softbank’s recipe to corner the US market.
While Clearwire hasn’t been doing too well, you’d imagine that this takeover by Softbank would help reinvigorate its desire to build up LTE network across the country.
Meanwhile, AT&T is having a good year. Shares of the $219 billion giant have rallied 25% this year, which is quite an achievement for a blue chip. AT&T also boasts a massive dividend payout of 44 cents per quarter. Despite this, you’d imagine there’s room for this blue chip to grow.
AT&T is the biggest mobile phone stock in the United States. Even though Verizon has the largest number of subscribers, it doesn’t own its mobile carrier subsidiary wholly. It has about 55% stake in that; contrast that with the fact that AT&T fully owns its subsidiary, AT&T Mobility, and all of its 89 million subscribers. The firm also owns about 40 million landline subscriptions and provides internet and TV services to millions.
Naturally most growth is in the wireless section, but cost of replacement to its fixed lines means hefty replacement costs and added expenses. The firm has a sound balance sheet too and the level of debt is quite favorable. The debt to equity ratio for the company is .623. The downside to the entire stock is the fact that it has got a high P/E ratio of 48.35.However when you look at all the other companies in this bracket, most notably Verizon, it seems comparable. Verizon has a P/E ratio of 45.20 and a debt to equity ratio of .579.
One of the key reasons why Verizon may be a better buy is the fact that they are running ahead of their 4G deployment schedule. The company will enter its 400th market on October 18th, a full two months ahead of schedule. They will enter 21 new markets on that very day and another 30 planned for November and December. As mentioned earlier, Verizon boasts the largest subscription base in the United States as well.
Yet at this moment with current PE ratios, telecom stocks seem to be a big no-no. However, logically you’d have to argue that the scope for growth in this sector is tremendous when you consider that data usage across wireless and handheld devices is only going to increase. Now may be a good time to pick up a few shares before the entire rat race catches up.
Ceciljohn2002 has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. 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.If you have questions about this post or the Fool’s blog network, click here for information.