Fighting Hard, But Stuck In The Middle
Reuben is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
AT&T (NYSE: T) has been losing ground to duopoly partner Verizon (NYSE: VZ) in recent years. Making matters worse, smaller players like T-Mobile (NYSE: TMUS) and Sprint Nextel (NYSE: S) have been nipping at its heels. AT&T, however, is fighting back.
The Big Boys
AT&T and Verizon are the two largest telecommunications companies in The United States. While they both have material land-line operations, their growth is coming from cell phones. Verizon's first quarter results were the stronger of the two, as customers signing up for data plans pushed the bottom line above analyst estimates. The stock jumped on the news.
AT&T's first quarter results led to a large share decline. Not only were the company's land line results weak, but its customer additions lagged behind Verizon. In other words, Verizon's business grew more than AT&T's. That's been a bit of a recurring theme.
The U.S. cell market is mature. That means that market share is the name of the game. It can be a tough and expensive fight. If it were just AT&T and Verizon locked in a market share battle, the blows would probably be easier to take. It isn't, however, and smaller players T-Mobile and Sprint are taking on AT&T from below at the same time that Verizon is proving its resolve at the top.
For example, T-Mobile now sells Apple's iPhone and has been using lower prices and no-contract deals to lure customers. The company's merger with MetroPCS has also helped it to gain scale in an industry where size matters a great deal.
That said, the merger was only recently completed, so how the company fares over the long-term is still up in the air. What is clear right now, however, is that T-Mobile is working hard to steal market share and AT&T is the easiest target. This year is going to be a transition year for T-Mobile's finances which makes it hard to say what results will look like. Regardless, investors would be better served sticking to industry leaders than buying into an also ran.
Sprint, meanwhile, is stuck in a merger haze. Japan's SoftBank and Dish Network are the big bidders right now, with recent reports that SoftBank was considering dropping its bid to buy T-Mobile instead. Those rumors seem to be false, since the pair have renewed their love affair. Still, this merger drama makes Sprint a bad option for all but the most aggressive investors.
What is quite clear, however, is that once a new owner emerges, Sprint will be a stronger competitor with a renewed focus on growth. That's likely to mean more aggressive promotional activity and more pressure on AT&T.
Never Say Never
AT&T, however, isn't sitting back doing nothing. In fact, the telecom giant recently announced that it will add more new customers than expected in the second quarter. According to The Wall Street Journal, the half million total is more than 150,000 more than added in the same period a year ago. Pushing the impressive customer gains were trade in offers and discounted tablets.
This is inspiring news for the giant. However, it comes at the cost of pressuring margins. Still, it allows the company to lock customers into multi-year AT&T contracts that the company hopes will allow it to earn a good return over time.
This is the way companies fight market share wars. Sometimes you need to take some near-term hits to open up long-term opportunities. Of course too many hits can lead to losing the war. So, it will be important to keep an eye on AT&T's promotional activity to ensure that its pricing decisions remain disciplined and rational.
AT&T shares yield around 5.1%, a full percentage point higher than Verizon shares. Although Verizon has been doing better of late, AT&T's second quarter looks likely to impress. At the very least, it will show that AT&T is still in the game.
Add to the mix that Verizon Wireless is a joint venture between Verizon and Vodofone. It is likely to cost Verizon over $100 billion dollars to gain full control of its wireless arm. That makes Verizon a far more complex growth story than many realize.
The top lines at both companies have been growing fairly steadily, so neither is a particularly bad company. However, with a full percentage point yield advantage, AT&T, the “underdog,” is probably a better option right now for income investors.
The Motley Fool's chief investment officer has selected his No. 1 stock for the next year. Find out which stock it is in the brand-new 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.
Reuben Brewer has no 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!