Is Verizon a Better Telecom Stock to Buy Than T-Mobile?

NYSE: VZ | Verizon Communications Inc.  News, Ratings, and Charts

VZ – Increasing adoption of 5G connectivity, Internet of Things (IoT), and other enhanced network capabilities amid the remote working and learning culture has bolstered the demand for services provided by leading telecom operators Verizon Communications (VZ) and T-Mobile US (TMUS). While both stocks should benefit from these industry tailwinds, we think VZ is better positioned to capitalize on them based on its higher profitability and growth prospects. Let’s discuss.

Verizon Communications Inc. (VZ) and T-Mobile US, Inc. (TMUS) are leading wireless communications service providers in the United States. Headquartered in New York, VZ delivers technology, residential fixed connectivity solutions, and entertainment services to businesses, consumers, and governments worldwide. Based in Washington, TMUS offers voice, messaging, and data services, wireless devices, and other accessories under the T-Mobile and Metro by T-Mobile brands.

With business organizations and consumers now relying more than ever before on connectivity and networking, the telecom industry is  thriving. With hyperconnected trends fostered by a remote working and learning culture amid the COVID-19 pandemic as the backdrop,  telecom service providers such as VZ and TMUS are investing heavily in 5G and other multi-use network strategies. Since widespread network connectivity is needed to facilitate the growing digital dependence, we think these two stocks are poised to generate big returns in  the  long run.

Over the past year, VZ has returned 8.7% while TMUS has gained 45.3%. But in terms of their past month’s performance, VZ is the clear winner with 5.2% gains versus TMUS’ 2.5%. Also, based on other financial metrics, VZ appears to be a better investment bet. Let’s take a closer look.

Click here to checkout our 5G Industry Report for 2021

Latest Movements

This month, VZ began expanding its 5G Home Internet service to 10 more cities and launched these services in areas  of Charlotte, N.C., Cincinnati, Ohio, Kansas City, Mo. and others. The company plans to increase total fixed wireless internet services to 15 million households by the end of this year.

Microsoft (MSFT)  recently named VZ as its early launch partner for its new Operator Connect platform, which has been developed to deliver  a more secure and enterprise-grade, end-to-end communications solution. The partnership should help VZ meet the hybrid workplaces’ increasing demands.

On March 30, TMUS announced that it intends to expand its partnership with Google (GOOGL)  to provide Android customers with more features and services, such as  default rich messaging, phone backup and cloud storage, premium TV  and  others. This should boost  TMUS’ ability to offer a broad range of services to its customers.

Also, this month, the company decided to administer a $3.8 billion public offering of  senior notes. TMUS plans to use $2.0 billion of the offering’s t proceeds  to acquire spectrum licenses pursuant to the FCC’s C-Band spectrum.

Recent Financial Results

During the fourth quarter, which ended December 31, VZ’s total wireless service revenue increased 2.2% year-over-year to $16.7 billion. The company’s adjusted ebitda  rose 5.3% from the prior-year quarter to $11.7 billion, while its operating income grew 8.1% from its year-ago value to $7.18 billion. VZ’s business segment’s ebitda margin was 24.6% versus  20.7% in the prior year quarter.

TMUS’ total services revenue increased 60.2% year-over-year to $14.18 billion in the fourth quarter ended December 31.The company’s adjusted ebitda increased 108.1% year-over-year to $6.75 billion. Its net cash provided by operating activities rose 126% from the year-ago value to $3.47 billion, while its free cash flow increased 35.2% sequentially to $476 million.

Past and Expected Financial Performance

VZ’s EBIT and total assets have increased at CAGRs of 3.1% and 7.2%, respectively, over the past three years. In comparison, TMUS’ EBIT has increased at a CAGR of 26.5% over the past three years, while its total assets grew 41.6% over this period.

VZ’s revenue is expected to rise 2.7% in the quarter ending March 30, 2021, 3.8% in the current year, and 2% next year. A  consensus EPS estimate indicates a 2.4% increase in the current quarter, and 3.7% improvement in fiscal 2021.

In comparison, the Street expects TMUS’ revenue to increase 70.3% in the current quarter, 14.8% in fiscal 2021 and 2.9% in 2022. However, the company’s EPS is estimated to decrease 48.2% in the current quarter and 2.6% in the current year.

Profitability      

VZ’s trailing-12-month’s revenue is almost two times TMUS’. Also, VZ is more profitable, with a gross profit margin of 60.1% versus TMUS’ 59.6%.

In fact, VZ’s ROE and ROA of 27.8% and 6.5%, respectively, compare favorably with TMUS’ 5.8% and 4.1%.

Valuation

In terms of trailing-12-month price/sales, TMUS is currently trading at 2.06x, 9.6% higher than VZ, which is currently trading at 1.88x. Also, its trailing-12-month’s ev/sales of 3.65x is 26.3% higher than VZ’s 2.89x.

TMUS is also more expensive in terms of trailing-12-month price/cash flow (17.69x vs 5.76) and trailing-12-month ev/ebitda  (10.59x vs 7.72x).

POWR Ratings

VZ has an overall rating of B, which equates to a Buy in our proprietary POWR Ratings system. However, TMUS has an overall rating of D, which translates to Sell. The POWR Ratings are calculated by considering 118 different factors with each factor weighted to an optimal degree.

In terms of Value Grade, VZ has a C, consistent with its lower-than-industry p/e ratio. But TMUS’ Value Grade of D is reflective of its higher-than-industry p/e ratio.

Both VZ and TMUS have a C Sentiment Grade, which is in sync with the analysts’ expectations regarding their earnings and revenue growth.

Also, VZ has a B Quality Grade, given its higher profitability. In comparison, TMUS has a Quality Grade of C.

Of the 25 stocks in the D-rated Telecom – Domestic industry, VZ is ranked #1, while TMUS is ranked #23.

In addition to the grades we’ve highlighted, our POWR Ratings system has also rated both VZ and TMUS for Growth, Stability, and Momentum. Get all VZ ratings here. Also, Click here to see the additional POWR Ratings for TMUS.

The Winner

While both VZ and TMUS are good long-term investments considering the massive shift toward virtual collaboration and technological advancements, VZ appears to be a better buy based on the factors discussed here. We think VZ’s much lower relative valuation and higher profitability should help the stock perform better in the long run.

Our research shows that the odds of success increase if one bets on stocks with an Overall POWR Rating of Buy or Strong Buy. Click here to learn about the top-rated stocks in the Telecom – Domestic industry.

The POWR Ratings are calculated by considering 118 different factors with each factor weighted to an optimal degree.

Click here to checkout our 5G Industry Report for 2021

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VZ shares were trading at $58.40 per share on Tuesday morning, down $0.43 (-0.73%). Year-to-date, VZ has gained 0.47%, versus a 5.68% rise in the benchmark S&P 500 index during the same period.


About the Author: Imon Ghosh


Imon is an investment analyst and journalist with an enthusiasm for financial research and writing. She began her career at Kantar IMRB, a leading market research and consumer consulting organization. More...


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