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Verizon vs. AT&T: Which Stock is a Better Buy?

With the rising applications of Internet of Things (IoT) in various sectors, the need for advanced technology is more popular than ever. The 5G revolution has already begun with new iPhones offering 5G. While it may take some time for the 5G industry to gain pace, both Verizon (VZ) and AT&T (T) are expected to soar. But let’s find out which of these two stocks is a better buy now.

Verizon Communications Inc. (VZ) and AT&T Inc. (T) have been dominating the telecommunications sector for a while. Both companies have gained popularity, especially with the highly anticipated arrival of the 5G network. As businesses have shifted online, both VZ and T have been witnessing a significant rise in their market demand.

Both stocks have generated significant returns over the past five years. VZ is a clear winner with a 35.5% gain over this period, versus T’s negative return. In terms of six-month performance, VZ’s 7.2% gain compares favorably with T’s negative return. But which of these stocks is a better pick now? Let's find out.

Latest Movements

VZ started offering the all-new iPhone 12 Pro Max and iPhone 12 mini on November 6th. Beginning November 5th, the company continued its 5G Home Internet expansion into Atlanta, Dallas, Denver, and San Jose. The first month trial promotion is open to participants subscribing to Verizon 5G Home service by December 31st and must be redeemed by February 28th, 2021.

Last month, VZ announced a partnership with World of Warships. The company is also expected to host two tournaments for the World of Warships and Veterans community in December. Ahead of the holiday season, Verizon Media and Walmart, Inc. (WMT) jointly started its holiday campaign recently this month. The “30 Days of Savings” campaign includes gift guides, a custom tool kit, and Yahoo shopping hub.

A couple of months back, VZ entered an agreement with America Movil (AMX)to acquire TracFone Wireless, Inc., the leading prepaid and value mobile provider in the United States.

Similar to VZ, T also started offering the new iPhone 12 models on November 6th online. The company is offering them at a discount of $700 by trading in an eligible smartphone. The models will be available in-store on November 13th. T also launched LG K92 5G, its lowest cost 5G device on November 6th.

T has been making efforts to monetize its non-core assets to drive an increase in its return on equity. In line with the plan, T sold its stake in Central European Media Enterprises Ltd. (CME) to Czech investment firm PPF Group N.V for $1.10 billion in October.

Recent Financial Results

VZ’s consumer total wireless retail net additions increased 90.2% year-over-year to 213 billion for the third quarter that ended September 2020. Throughout the quarter, VZ gradually reopened all of its company-operated retail stores abiding by safety measures. Business wireless service revenues increased 4.9% year-over-year to $3 billion, driven by public sector and small and medium business sales. Business Fios revenues increased 8.2% year-over-year to $263 billion.

T’s operating revenues increased 3.4% year-over-year to $42.34 billion for the third quarter that ended September 2020. The strong quarter results were mainly driven by impressive subscriber growth. Total mobility and subscriber connections increased 8.9% year-over-year to 176 billion. Operating revenues from Warner Media increased 10.3% sequentially to $7.51 billion.

Past and Expected Financial Performance

VZ’s revenue and EBITDA grew at a CAGR of 1.1% and 0.9%, respectively, over the past 3 years. The market expects the company’s revenue to increase 3.7% next year. VZ’ EPS is expected to grow 2.9% next year.

On the other hand, T’s revenue and EBITDA grew at a CAGR of 2.5% and 4.8%, respectively, over the past 3 years. The market expects T’s revenue to increase 1.6% next year. The company’s EPS is also expected to grow 1.6% next year.

Thus, VZ has an edge over T here.

Profitability

T’s trailing-12-month revenue is 1.35 times what VZ generates. But VZ is more profitable with a gross profit margin of 59.5% versus T’s 53.9%.

Moreover, VZ’s ROE and ROA of 29.72% and 6.64% compare favorably with T’s 6.37% and 3.42%, respectively.

Valuation

In terms of forward P/E, VZ is currently trading at 12.60x, 38.5% more expensive than T, which is currently trading at 9.10x. VZ is more expensive in terms of trailing-12-month P/S (1.97x versus T’s 1.20x). VZ’s forward PEG of 4.42x is 34.8% higher than T’s 3.28x.

In terms of trailing-12-month price/cash flow, VZ’s 6.10x is 33.5% higher than T’s 4.57x.

Though VZ is relatively more expensive compared to T, it’s worth paying this premium considering VZ’s significantly higher earnings growth potential and consistent returns over the past years.

POWR Ratings

While VZ is rated a “Buy” in our proprietary POWR Ratings system, T is rated “Neutral”. Here’s how the four components of the POWR Ratings are graded for both these stocks:

VZ has an “A’ for Buy & Hold Grade and Peer Grade and a “B” for Trade Grade and Industry Rank. It is currently ranked #2 out of 25 stocks in the Telecom - Domestic industry.

T has a “B” for Industry Rank, a “C” for Buy & Hold Grade, and Peer Grade, and a “D” for Trade Grade. It is currently ranked #7 in the same industry.

The Winner

Both VZ and T have been monetizing the growing demand for 5G networks. However, VZ appears to be a better buy despite trading at a higher valuation based on its higher earnings growth potential. While T has been struggling to increase shareholder value, VZ has been expanding its market and made several strategic acquisitions, driving its growth.

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VZ shares were trading at $60.94 per share on Wednesday afternoon, down $0.16 (-0.26%). Year-to-date, VZ has gained 3.59%, versus a 12.41% rise in the benchmark S&P 500 index during the same period.



About the Author: Manisha Chatterjee

Since she was young, Manisha has had a strong interest in the stock market. She majored in Economics in college and has a passion for writing, which has led to her career as a research analyst.

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