AT&T Inc. (NYSE:T) shares are down more than -15.68% this year and recently decreased -6.10% or -$2.33 to settle at $35.86. Verizon Communications Inc. (NYSE:VZ), on the other hand, is down -9.42% year to date as of 10/12/2017. It currently trades at $48.35 and has returned -2.85% during the past week.
AT&T Inc. (NYSE:T) and Verizon Communications Inc. (NYSE:VZ) are the two most active stocks in the Telecom Services – Domestic industry based on today’s trading volumes. Investors are clearly interested in the two names, but is one a better choice than the other? We will compare the two companies across growth, profitability, risk, valuation, and insider trends to answer this question.
The ability to consistently grow earnings at a high compound rate is a defining characteristic of the best companies for long-term investment. Analysts expect T to grow earnings at a 6.65% annual rate over the next 5 years. Comparatively, VZ is expected to grow at a 1.13% annual rate. All else equal, T’s higher growth rate would imply a greater potential for capital appreciation.
Profitability and Returns
Growth in and of itself is not necessarily valuable, and it can even be harmful to shareholders if companies overinvest in unprofitable projects in pursuit of that growth. We will use EBITDA margin and Return on Investment (ROI), which adjust for differences in capital structure, as measure of profitability and return. , compared to an EBITDA margin of 36.68% for Verizon Communications Inc. (VZ). T’s ROI is 7.20% while VZ has a ROI of 15.10%. The interpretation is that VZ’s business generates a higher return on investment than T’s.
The value of a stock is simply the present value of its future free cash flows. T’s free cash flow (“FCF”) per share for the trailing twelve months was +0.12. Comparatively, VZ’s free cash flow per share was +0.47. On a percent-of-sales basis, T’s free cash flow was 0.45% while VZ converted 1.52% of its revenues into cash flow. This means that, for a given level of sales, VZ is able to generate more free cash flow for investors.
Liquidity and Financial Risk
Liquidity and leverage ratios provide insight into the financial health of a company, and allow investors to determine the likelihood that the company will be able to continue operating as a going concern. T has a current ratio of 1.10 compared to 1.00 for VZ. This means that T can more easily cover its most immediate liabilities over the next twelve months. T’s debt-to-equity ratio is 1.15 versus a D/E of 4.67 for VZ. VZ is therefore the more solvent of the two companies, and has lower financial risk.
T trades at a forward P/E of 11.98, a P/B of 1.77, and a P/S of 1.36, compared to a forward P/E of 12.66, a P/B of 7.84, and a P/S of 1.60 for VZ. T is the cheaper of the two stocks on an earnings, book value and sales basis. Given that earnings are what matter most to investors, analysts tend to place a greater weight on the P/E.
Analyst Price Targets and Opinions
When investing it’s crucial to distinguish between price and value. As Warren Buffet said, “price is what you pay, value is what you get”. T is currently priced at a -12.6% to its one-year price target of 41.03. Comparatively, VZ is -2.6% relative to its price target of 49.64. This suggests that T is the better investment over the next year.
The average investment recommendation on a scale of 1 to 5 (1 being a strong buy, 3 a hold, and 5 a sell) is 2.60 for T and 2.70 for VZ, which implies that analysts are more bullish on the outlook for VZ.
Risk and Volatility
No discussion on value is complete without taking into account risk. Analysts use a stock’s beta, which measures the volatility of a stock compared to the overall market, to measure systematic risk. A stock with a beta above 1 is more volatile than the market. Conversely, a beta below 1 implies a below average level of risk. T has a beta of 0.45 and VZ’s beta is 0.56. T’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
Short interest, or the percentage of a stock’s tradable shares currently being shorted, is another metric investors use to get a pulse on sentiment.T has a short ratio of 7.68 compared to a short interest of 2.61 for VZ. This implies that the market is currently less bearish on the outlook for VZ.
AT&T Inc. (NYSE:T) beats Verizon Communications Inc. (NYSE:VZ) on a total of 9 of the 14 factors compared between the two stocks. T is growing fastly, higher liquidity and has lower financial risk. In terms of valuation, T is the cheaper of the two stocks on an earnings, book value and sales basis, T is more undervalued relative to its price target. Finally, OKTA has better sentiment signals based on short interest.