Telecom a Two-Horse Race Even if AT&T, T-Mobile Deal Fails

AT&T and Verizon will still rule the market, eventually

   

Poor AT&T (NYSE:T). We just learned today that the Department of Justice will try to block its proposed merger with T-Mobile.

How will AT&T muddle through with a measly $125 billion in annual revenue and just 110 million wireless subscribers? Whatever will the company do with its $3.8 billion cash stockpile if it can’t buy this competitor?

In case you haven’t sensed the sarcasm yet, wake up and smell the coffee. AT&T hardly is on the brink of collapse and hardly a bit player in the telecom sector. The sad reality is that the mobile marketplace has been consolidating for some time, and this will continue with or without the merger.

Yes, the disappointment at AT&T is palpable today, reflected in a 3% decline in its stock so far today. Similarly, the relief at battered No. 3 telecom Sprint (NYSE:S) is significant. Sprint saw its stock pop as much as 10% today.

But beyond these short-term reactions, we have to remember three important things:

First, AT&T and compatriot Verizon (NYSE:VZ) already are entrenched as the leaders in mobile. AT&T holds 27% of wireless subscribers and Verizon boasts well over 30%. More importantly, both are soundly profitable and throw off tremendous amounts of cash — compared with Sprint, which hasn’t turned a profit since early 2007.

Secondly, T-Mobile might not be long for this world even if the buyout has been squashed. Sprint reportedly is getting the Apple (NASDAQ:AAPL) iPhone in October, based on reports from The Wall Street Journal and other reputable sources. We all know that carriers are beholden to their hardware, and T-Mobile will remain on the outside looking in. Worse, there are many experts that say the iPhone 5 won’t even be able to save Sprint. So where does that leave T-Mobile? T-Mobile already has lost 150,000 subscribers so far on the year, and we’re not even to September yet. The writing is on the wall.

Third, consumers shouldn’t fool themselves into thinking that this is some kind victory for choice. Consider that a few months ago, AT&T unveiled plans to eliminate its unlimited mobile phone data plan and replace it with capped options. Verizon soon after moved to do the same thing. Yes, T-Mobile and Sprint still offer the packages, but how much longer can they afford to do so? Sprint still is far from break-even, and T-Mobile’s Q2 report showed profits fell by nearly half from the same period last year. Offering more services at a lower price sounds all well and good, but the math just isn’t adding up for the smaller carriers.

So what’s next for AT&T, Verizon and wireless customers in the U.S.?

Well, investors should consider this news a buying opportunity in AT&T stock after the sell-off. The dividend of 6% is reason enough to buy shares — that’s almost three times the rate of return you would get in a CD or high-yield savings account. And out of 25 price targets for AT&T stock, the highest target is $36 for shares and the lowest is $29 — meaning every expert expects shares to go up from current levels. The only question is whether they go up a little or a lot.

As for consumers, expect the status quo to remain intact, with AT&T and Verizon slowly wearing away competitors T-Mobile and Sprint. Eventually something has to give — and surely one of those things will be Sprint or T-Mobile.

The only question is how long it will take.

Jeff Reeves is editor of InvestorPlace.com. As of this writing, he did not own a position in any of the stocks named here. Follow him on Twitter via @JeffReevesIP and become a fan of InvestorPlace on Facebook.


Article printed from InvestorPlace Media, http://investorplace.com/2011/08/att-nyse-t-mobile-merger-verizon-vz-sprint-s/.

©2014 InvestorPlace Media, LLC

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