In recent days since earnings season has ended, we have been covering several key investor sectors for new price targets and what will likely help the key companies in each sector to meet or exceed their price targets. These include the widely held stocks of AT&T (T), Verizon (VZ), Qwest (Q), and Sprint Nextel (S). We even went briefly into the conundrum of the two ‘other wireless carriers’ of Leap Wireless (LEAP) and MetroPCS Communications. (PCS).
AT&T (T) and Verizon (VZ) are the two “utilities” of the telecom sector, and by far the most widely held stocks of all telecom stocks in America. If you have a stock mutual fund or have any equity mutual funds in your retirement accounts, chances are that you have exposure to either or both of these DJIA components. Both of these companies have been under fire from competing wireless operations and as cable companies began offering the triple pay of cable plus the phone and internet access. But despite all the hoopla of the death of the telecom sector, these have managed to keep a broad hold in the communications sector.
AT&T saw $2.12 in 2009 on $123.02 billion in revenues. AT&T is not just a copper wire telecom story. The big draw here is the exclusivity of its iPhone deal with Apple (AAPL) for the wireless war. The most obvious issue here that will keep or allow it to lose potentially billions of dollars of revenues is whether it holds the iPhone on an exclusive basis. Analysts are looking for growth in 2010 and 2011: earnings (EPS) of $2.19 and $2.37 on revenues of $124.13 billion and $126.12 billion, respectively. Thomson Reuters has an average price target of $29.63 to $30.00 versus a $24.90 share price. That implies a 20% upside. The other key is that its dividend of $1.68 annualized is likely to be raised again. The company can raise that yield further, but not by all that much. AT&T’s uVerse high-speed internet and cable TV has grown yet has not made a major dent on the cable and ISP markets. A $30.00 target would translate to 13.7-times this year’s earnings. That is not expensive, but that leaves very little room for upside as we enter 2011. The 6.8% dividend yield is what keeps investors in the stock.
Verizon (VZ) shares very similar issues as AT&T in its maturity, although it may actually get the iPhone on a non-exclusive basis either later in 2010 or into 2011. Its figures for 2009 were $2.40 EPS on $107.81 billion in revenues. Analysts are looking for mixed growth in 2010 and 2011: Thomson Reuters has estimates for earnings (EPS) of $2.35 and $2.52 on revenues of $108.58 billion and $110.23 billion, respectively. Analysts have an average price target of $32.81 to $33.00, implying about 10% upside from a $29.00 share price with a forward valuation of about 14-times earnings. Verizon’s FiOS has also grown yet also failed to make a major dent in the high-speed internet and cable market. Verizon’s dividend is also one which has risen and risen and that will be a steady issue. Like AT&T, it can raise its dividend but it can’t go crazy on the payout as it is already at 6.6% based on today’s prices. Here is the issue at hand. If Verizon can get to offer the iPhone, then it is going to be able to steal away AT&T’s thunder at least for a trade. It already has a more robust carrier network for wireless coverage.
When it comes to AT&T versus Verizon, investors buying for major appreciation might have to look elsewhere. But with dividend yields of 6% at a time when Treasuries pay 1% or far less, the existing investor base is unlikely to throw in the towel on either company. There is one risk that both share today and that is the ongoing price cuts to its wireless contracts. Any escalated price war is only bad for both, hands down.
Sprint (S) is losing money and is expected to keep losing money. Its 2009 results were -$0.84 EPS on $32.26 billion in revenues. As far as growth, forget about it as far as Thomson Reuters is concerned: 2010 estimates are -$0.64 EPS and $31.84 billion in revenues; 2011 estimates are -$0.52 EPS and $31.55 billion in revenues. But Sprint has one thing up its sleeve here besides a disappointing acquisition of Nextel. The company does offer a rather handy prepaid brand via Virgin after the late 2009 merger and it also has ties in for Clearwire (CLWR). It also recently closed that deal to acquire the last of its domestic ‘PCS’ affiliates which effectively removed hundreds of millions of dollars of pending liabilities that it did not have the budget to pay for. At $3.37 today, its 52-week trading range is $2.78 to $5.95. What makes Sprint unique is that it is the one name in telecom that always comes up as a potential buyout target for T-Mobile of Deutsche Telekom and a host of other players. That gives it a phantom floor or phantom premium that could actually be realized. Analysts have a price target of close to $4.50, but these targets are literally all over. If the company could bring in a better turnaround team, can work better to consolidate its multiple network standards, and could figure out a better cost cut strategy, Sprint offers what may be the most upside of the entire group. It also has much more risk. Sprint has not had a dividend since 2007, so literally except for those who are long and wrong it has no locked-in shareholder loyalty. Its stock trades at the lowest multiple (actually a fraction of) revenues. If the company can make one of three internal efforts, it might not even need a buyout rumor again for the stock to get back up closer to $6.00 again.
Qwest (Q) is the wild card of the pure land-line stocks in the telecom sector. Its 2009 pro forma results were $0.38 EPS on $12.31 billion in revenues. Because Qwest effectively has no wireless operations, there is no growth expected here. Thomson Reuters has estimates for 2010 and 2011 of $0.33 EPS for each year and $11.62 billion in 2010 revenues and $11.31 billion in 2011 revenues. It has had a high dividend of $0.32 per year paid quarterly, and offers roughly a 7% yield. Analysts have an average price target of $5.20 to $5.50, leaving upside of about 15% to 22% from a $4.50 price today. One problem is that Qwest’s 52-week high is $4.87 and $5.00 looks to be the level where many natural sellers would exit the stock rather than sell the stock. If Qwest was steadily growing it might not be a concern. But by now everyone knows that it is less reliable in the old telecom sector. The 7% yield sounds very attractive, but not when you consider that both AT&T and Verizon pay over 6%. Qwest has a history big gains and big misses, so the risk-reward here is less attractive than in the safety nets of the big players.
In the world of prepaid or no-contract wireless telecom, there is a tie between Leap Wireless (LEAP) and MetroPCS Communications (PCS). The reality is that one or both of these companies are likely to be involved in M&A. There was a merger long ago proposed between the two, but greed got in the way at far higher share prices. These two are in a niche that they really just need to bite the bullet today and do a stock for stock merger together. Today’s stance is one of need rather than greed. This would allow it to be far more competitive against the larger prepaid or no-contract offerings on the market. The problem here is that neither shareholder would be rewarded much in a merger. Picking price targets here on these two is a no-win situation that is only worth a review if these two decide to tie the knot.
Here is the problem of the telecom sector today. In the U.S. it is a mature market. How many people do you know that have not had a cellphone for a decade? The difference is that now we have smartphones to go after. Telecom investors today will have to reach down into the land of the old CLEC or other smaller regional players if they want to get growth. Or there is still international. But investing in these today looks to be more for the raw dividend than in the past. But that does leave on strategy to add to income enhancement here… writing covered calls..
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