Mobile Operators: Which is the Best Bet for Profits?

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

With a declining number of new mobile subscriptions, is China Mobile (NYSE: CHL) able to earn you profits on your hard earned money? Сan AT&T (NYSE: T) help you realize gains? Is Verizon (NYSE: VZ) communications a better option to invest in? The following article scrutinizes all the above-mentioned companies to give you the answers to these questions.

Recent events

China Mobile is the largest mobile service provider in terms of subscriber base, with roughly 700 million subscribers. The telecom company serves the largest emerging market with exceptional escalation potentials. The Chinese mobile market experienced a year-over-year growth rate of 12%, heading towards a 1.17 billion subscriber base.

Recently, China Mobile has hit another milestone figure of 129.40 million 3G subscribers, the highest number of 3G subscribers in the country. Moreover, the company is aggressively pursuing 4G developments, investing around $6.7 billion to launch 4G services in 344 Chinese cities. The company plans to officially launch 4G services later this year, which should provide a decent average return per user. Furthermore, introduction of 4G enhances the growth prospects of the company by many folds, providing the investors with reasonable and long-term returns.

Avoiding global expansions and diversification, China Mobile has always focused on its home market. The company has been allowed to hedge itself from stern regulatory interference in potential host countries.

AT&T's financials project a mixed sentiment among the market analysts. The company has experienced a decline in revenues as well as in net income. The company reported a negative net income in the second quarter of 2012 due to customer additions and pursuit of growth opportunities. This trend is expected to continue as similar costs are expected to suppress the margins in the second quarter this year.

The company faced a reduction in mobile phone subscriptions, while sustaining growth in tablet subscribers; however, the tablet subscribers are not as profitable as the phone subscriptions. AT&T’s revenue growth is annually 2%, where the company is lagging behind its competitors. To top the low growth rates, the APRU is merely 0.9%, far lower than the forecasted 1.9%.

Industry saturation is another reason for sluggish customer growth, which AT&T is countering by squeezing more money from its existing subscribers. Furthermore, AT&T is allegedly selling personal subscriber data to the U.S. government, which has spurred negative sentiments in the customers. All this has boiled down to the retardation of customer growth, resulting in lower demand.

Verizon Communications has very promising growth rates this quarter, with an 8.6% increase in its revenue this quarter. The company's net income, which was reported to be in negative figures in the last quarter of 2012, has also revived.

The U.S. telecom industry overall has witnessed a decline in new subscriptions due to intense industry saturation. To contain that, Verizon like its rivals has increased the charge on their plans. There has been a 60% reduction new subscription in the first quarter. The revenue from new subscriptions has experienced a whopping fall from 20% to merely 2%. Hence, the revised rates.

Verizon is also involved in transmitting customer data to government agencies, which is leading to reduced new subscriptions. On the other hand, Verizon is trying to make its way into Canada, attempting to work out an acquisition. Canada seems to be a lucrative market, which would add value to the company financials if materialized, though a lot of other competitors are trying to reach a mutual understanding with the target firm.

Competition

Indicators

China Mobile 

AT&T

Verizon Communications

Price/Earnings TTM

10.1

27.5

128.2

Price/Book

1.8

2.2

4.5

Revenue Growth

(3 Yr. average)

7.4

1.3

2.4

Net Income Growth

(3 Yr. average)

3.9

-15.7

-47.3

Return on Equity

18.8

7.7

3.3

Dividend Yield

3.79%

5.03%

4.04%

Current Price

$51.55

$35.32

$50.48

Data from Morningstar and Financial Visualizations on July 11, 2013

As evident from the financial ratios, China Mobile has the highest ROE. Having said that, the company has the greatest revenue and income growth figures, when compared to the negative income figures for AT&T and Verizon Communications.

Despite the low dividend yield, China Mobile is in a better position to provide its customer with the returns, which of course depends on the net income available to the customers. AT&T and Verizon Communications have almost all their ratios far negatively deviated from the industry averages. On the contrary, the figures for China Mobile put it in a better position to materialize the returns for its investors.

Finalizing thoughts

I believe that China Mobile is the best bet in this selection. China Mobile is serving the world's largest emerging market, with the largest population coupled with the highest subscribers. This company, though, avoids entering international markets and confines itself to the indigenous home market, is in my opinion a plus for it. Realizing the returns from 4G would greatly enhance China Mobile’s financial position. Amid the global economic crunch, the company is well equipped to maintain its current position as well as growth. The company is continuously on a roll with increasing subscriptions, which gives it an edge over the competitors. 

The Motley Fool's chief investment officer has selected his No. 1 stock for this year. Find out which stock it is in the special free report: "The Motley Fool's Top Stock for 2013." Just click here to access the report and find out the name of this under-the-radar company.


Marina Avilkina has no position in any stocks mentioned. The Motley Fool owns shares of China Mobile. 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!

blog comments powered by Disqus

Compare Brokers

Fool Disclosure