Investors rewarded Verizon Communication stock (VZ) stock for most of 2018, as the telecom giant grew leaner, meaner, and more focused. While competitors AT&T (T) and T-Mobile US (TMUS) embarked on capital- and attention-sapping merger sagas, newly installed Verizon CEO Hans Vestberg doubled down on his company’s core competency: its network infrastructure.
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With the year almost over, we’re taking a look at all 30 stocks in the Dow Jones Industrial Average, starting with the worst performer— Goldman Sachs Group (GS)—and working our way up to the highest-flying stock in the benchmark— Merck (MRK). The rankings may shift before the close of 2018 trading, but the stories behind the stocks shouldn’t.
Through Dec. 1, Verizon stock had handily beat the market, returning 19.3%, including $2.37 in dividends per share. That beat the S&P 500’s 5.1% return—and, perhaps more satisfyingly, AT&T stock’s 14.9% loss. Such a divergence between the arch-rivals’ stocks is unusual, but differences in their strategies have rarely been so stark.
Following the stock market’s tumble in December, Verizon stock has now returned 9.4% in 2018, versus the Dow’s 4.3% decline.
Editor's Choice
Facing a DirecTV business declining due to a steady exodus of cord-cutters, AT&T made a major move downstream by acquiring TimeWarner for $81 billion earlier this year. To fund the deal, AT&T had to substantially increase its debt load, while Verizon’s reached its lowest level in several years last quarter, at 2.4 times debt to earnings before interest, taxes, depreciation, and amortization, or Ebitda. AT&T’s post-merger leverage? Close to 4 times debt-to-Ebitda. Add to that the frictions inherent with incorporating a new businesses, and investors chose to stay away.
Meanwhile, after years of margin-hurting discounts and promotions by each of the big four telecom companies in the U.S., wireless phone market revenues returned to growth in 2018. That was particularly good news for Verizon, which has stayed out of the industry’s merger mania and remains largely a stable and profitable mobile phone service business.
Sprint Sector In The Stock Market Symbol
It’s the U.S. wireless leader, with 112 million “postpaid” connections—those billed after monthly usage is calculated—versus 77 million for AT&T. Analysts expect that Verizon’s Wireless revenues—which make up 70% of its total sales versus 40% for AT&T—increased 4% in 2018, while the segment’s Ebitda grew over 10% due to improved pricing. A proposed merger between Sprint (S) and T-Mobile could put an end to the industry’s competitive pricing wars for good.
Read our recent stock pick: Verizon Stock Has Room to Rise on 5G — if You’re Patient
That allows Verizon to focus its attention and its capital on the long-term opportunity: 5G. Building out a nationwide network will be a massive— and massively expensive—undertaking, requiring laying miles of fiber optic cable and thousands of new antenna arrays. Thanks to fewer distractions and much smaller debt-repayment obligations than AT&T, forward-looking investors picked Verizon as the race’s eventual winner this year.
Different Sectors In Stock Market
Write to Nicholas Jasinski at [email protected]
T-Mobile (TMUS+0.8%) earned an upgrade to Buy from MoffettNathanson, which says the breakup of merger talks with Sprint (S+0.2%) will ultimately benefit the upstart No. 3 carrier.
The collapse of the deal 'will ultimately prove to be good news for the sector,' writes Craig Moffett, though with one clear loser: “Robbed of the prospect of a merger — at least for now — Sprint will now have to focus on sustainability. That means less, not more, promotionality.'
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And that means fewer net subscriber additions, which will be absorbed by Sprint's rivals, he adds.
Moffett has raised his price target on TMUS to $73 from $69, while trimming his price target on Sprint to $2 from $6. (Sprint's currently at $6.16.)
He's reiterated a Buy on Verizon (VZ+1.6%; $51 price target) and a Neutral on AT&T (T-0.2%), based on wireline troubles, debt and declining revenues at DirecTV.
Now read: Actionable Insights - Strong Performance In Q3 2017 »
Nationwide telecom Sprint(NYSE:S) has been on fire recently. The stock has gained 12% over the last three months and managed to hold steady in the last four weeks, handily beating the broader market in both cases.
That doesn't necessarily mean Sprint is on a long-term roll. In fact, the stock is not likely to keep growing from this plateau. Sector rival T-Mobile USA(NASDAQ:TMUS) is merging with Sprint in a blockbuster deal, leaving little room for further improvement.
Steady as she goes
The stock-swap merger proposal involves giving current Sprint owners 0.10256 T-Mobile shares for each of their Sprint stubs. Flipping the math around, it takes 9.75 Sprint shares to generate a single T-Mobile share. The implied total enterprise value of this theoretical beast was approximately $146 billion on the day of the announcement. After some wild swings over the summer, both stocks are back to where they were six months ago, so not much has changed.
Sprint's strong gains in recent months have nothing to do with stellar business results. It's joined at the hip to T-Mobile, and the market strength of late comes from T-Mobile's solid results and a rising probability that the merger will take place.
If you assume that T-Mobile's buyout will close, there's really no reason to buy or hold Sprint today. You'd be just as closely invested in Sprint by simply selling all your Sprint shares and reinvesting them directly in T-Mobile instead. And this is the best-case scenario here.
Image source: Getty Images.
What if the merger fails?
Let's say T-Mobile and Sprint fail to convince regulators that American consumers need a third huge telecom that can challenge Verizon Communications and AT&T on a level playing field. Or perhaps the Trump administration steps in to cancel the pending merger for whatever reason. The companies don't expect their merger to close before the middle of 2019, so a lot can still happen.
In that case, both T-Mobile's and Sprint's shareholders will take a big haircut on the failure of their agreement. That's a normal market reaction to any blocked acquisition. Even from that deep, dank discount, I'd hate to be a Sprint owner.
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T-Mobile has been on a roll of its own in recent years. The self-proclaimed 'uncarrier' is adding subscribers faster than any of its three major rivals. At the same time, Sprint must settle for celebrating small victories wherever it may find them. There's no big, loud turnaround action going on here. T-Mobile will do all right without Sprint -- but that's not true for its intended buyout target.
I believe there's nearly no hope that Sprint would be a viable business if this deal falls through. Therefore, I'd be much more comfortable holding T-Mobile shares in these uncertain times. With or without the final John Hancock on T-Mobile's buyout papers, T-Mobile shares are at least as good of an investment as Sprint -- and in the worst case scenario, a far better one.