Is AT&T Still the Best Value in Telecom?

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The week of June 17 saw the Dow Jones Industrial Average fall almost 200 points from the prior week. With fears of the Brexit, and with the Federal Open Market Committee (FOMC) not signaling any rapid interest rate hikes for farther out than expected, there remains a focus on which companies have big dividend yields which are safe. In telecom and wireless phone providers, there exist two stable players, one rising player and one that is expected to keep losing money.

AT&T Inc. (NYSE: T) and Verizon Communications Inc. (NYSE: VZ) are the stable players, with T-Mobile US Inc. (NYSE: TMUS) the rising star. Sprint Corp. (NYSE: S) is expected to keep losing money, and the U.S. regulators just won’t let Sprint be acquired because they like four carriers, even if one of them cannot make any money.

A Jefferies research report late in the week suggests that there is more stability in this sector than some investors might think. The Jefferies analysts said:

In our view, the competitive environment remains relatively stable, with carriers disciplined on both pricing and promotions. We expect attention to turn to the potential impact from a new iPhone, with initial commentary suggesting a continuation of softer volumes, supportive to fourth quarter margins. However, promotional activity remains a wild card and we suspect it could pick up in the second half of 2016.

Mike McCormack and Scott Goldman favor AT&T for now. They have a Buy rating and a $44 price target on it. That is almost 10% higher than the $40.49 prior closing price, although AT&T did close up 24 cents at $40.73 on Friday. Then there is the 4.7% dividend yield to consider. AT&T’s 52-week trading range is $30.97 to $40.86, and the Thomson First Call universe of analysts has a consensus price target of $39.56.

Verizon ended the week at $53.78 a share and has only a Hold rating at Jefferies. The firm’s $53 price target is barely above the consensus analyst target price of $52.33. Verizon’s yield is 4.3%, and its 52-week range is $38.06 to $54.49. Jefferies said on Verizon:

We update estimates to reflect recent management commentary around the elevated impact of the 2Q strike, resulting in a reduction in 2Q EPS from $0.97 to $0.94. However, we maintain our 2016 EPS estimate of $3.89 as lower upgrades and lower EIPdriven ARPA benefits should benefit margins in the back half of the year.

Sprint comes with the lowest rating that Jefferies has: Underperform. Its price target of $2.25 is also way under the most recent $3.71 closing price. Sprint of course is harder to analyze, being a tracking unit of Softbank (for all practical purposes at least). Sprint’s consensus price target is higher, and the 52-week range is $2.18 to $5.29. Sprint’s area, brought up by Jefferies, was around the elusive profitability:

While Sprint has shifted to less emphasis on market share in favor of profitability, we nonetheless boost gross adds to better reflect seasonal trends. However, we simultaneously increase postpaid churn, to 1.59%, reflecting the first y/y increase since C4Q14, driven by tablet subscribers coming off of promotions. On a net basis, we increase postpaid additions to 75k, including 50k handsets, though both figures are below current consensus. We see moderating postpaid ARPU declines (JEFe -8.3%) as penetration of financed devices narrows with overall penetration of such plans. We expect continued emphasis on profitability and progress towards cost reduction targets.

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Investors consider T-Mobile to be more like Sprint than like AT&T or Verizon, but Jefferies has a Buy rating and $45 price target on it. Shares closed at $41.77 on Friday, and the consensus price target is $47.21. The 52-week range is $33.23 to $44.13. The analysts said on T-Mobile:

We now anticipate leasing to represent ~10% of device sales, down from low-teens previously. The stock issuance associated with the new loyalty program is expected to be treated as a contra-revenue while the Tuesday gifts are likely be expensed.