Three Overpriced Telecom Stocks

Daniel is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

With the fiscal cliff rapidly approaching, and problems in Europe continuing unabated, many investors are looking towards the more defensive sectors as a means of hedging their risk-on portfolios or simply to achieve growth. Telecom is one of these defensive industries, but how safe are these companies really? Digging around, it appears that the industry as a whole is overvalued compared to the broader market. Therefore, I would argue that investing here would require some additional scrutiny. In this article I will present three telecom stocks that to my mind are currently overvalued, based on data supplied by Yahoo! Finance and CNBC.

AT&T

AT&T (NYSE: T), an American wireless communication giant, has a market cap of almost $190 billion and revenue approaching $130 billion. The stock has had a good run in the last year, up about 14.8%, but started showing some weakness last month despite beating EPS estimates by $0.03. With a high TTM P/E of 47.84x earnings, the stock is way over the already pricey average P/E of fixed-line telecommunications which stands at about 29.1x earnings. The price to book is more reasonable at around 1.88, but the return on equity is a disappointing 4.01%. It doesn’t look like there is much value to be found here at the moment, except the forward P/E which is a promising 12.92x.

Verizon

Verizon (NYSE: VZ) is one of AT&T’s largest American competitors in the wireless communication industry, with a market cap of just over $120 billion and revenue of about $114 billion. Like AT&T, Verizon is a low-beta, high dividend stock which has seen a good run in the last twelve months. However, the valuation now also appears to be well into overpriced territory with a TTM P/E of around 39.4x earnings. For reference, the average P/E of the S&P 500 sits around 18.8x earnings at the moment. Verizon also has a fairly high price to book of around 3.23, but a very decent return on equity of 13.62%. .

Deutsche Telekom

This European telecom titan perhaps takes the cake in terms of high valuation. With a market cap of $46 billion and revenue of about $75 billion, Deutsche Telekom (NASDAQOTH:DTEGY) is a big player, but is also sitting on almost 60 billion worth of debt. The TTM P/E stands at 61.2x earnings, which is the highest of the bunch presented here. Price to book looks a lot better at 1.07, as well as the forward P/E of 15.08x. Return on equity is a measly 2.23% and their profit margin is only 1%.

Those looking for value in European telecom would be better off elsewhere, such as Vodafone (NASDAQ: VOD) or Telefonica (NYSE: TEF), both of which have a TTM P/E of under 13x and solid profit margins, although they carry a fairly high amount of debt and face troubling earnings growth. Vodafone is looking at a debt of about $55 billion, giving them a debt to equity ratio of just over 44, and Telefonica has almost $90 billion in debt with a deeply troubling debt to equity ratio of around 265.

Bottom Line

Telecom is a traditionally defensive, low-beta and high dividend industry. For this reason, it tends to outperform during tough economic times, such as those we may be facing as we near the fiscal cliff. However, I would advise defensive investors to be wary of the industry at large, as it seems overpriced compared to the broader market. Especially the three stocks I mentioned here appear overvalued and ripe for a correction. The bottom line is that due diligence must always be performed, even in relatively safe industries.

 

 


DUJames has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend AT&T.; 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.

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