Verizon Communications Inc. (VZ), AT&T Inc. (T): Phone Giants, Attractive Investments?

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Recently there has been a lot of chatter about telecom companies — both domestic and international.  The majority of analysts, though, tend to rate our two largest telecom companies, Verizon Communications Inc. (NYSE:VZ) and AT&T Inc. (NYSE:T) as a Hold.  And they seem more skeptical about some of the large international telecom companies.

In full disclosure, a few years ago, I owned shares in both Verizon Communications Inc. (NYSE:VZ) and AT&T Inc. (NYSE:T), but I sold all of my shares once I felt that those stocks were “fully valued.”  Instead, I took my money and invested in some of the large international telecom companies.

Verizon Communications Inc. (NYSE:VZ)At that time, my investment thesis was based on the following “foundational beliefs:” (1) Europe will eventually recover (and many international telecoms will be some of the first companies to benefit); (2) people cannot live without cell phones (even in countries where unemployment tops 25%); (3) several international telecoms have the potential to grow revenues and earnings (by increasing penetration in emerging markets); and (4) the largest telecoms are very strategic industries that stand little chance of ever going bankrupt (their governments will not allow that to happen).

The two telecoms that dominate the US market

Verizon Communications Inc. (NYSE:VZ) and AT&T Inc. (NYSE:T), two companies that have more similarities than differences, dominate the US market.  Both of them have market caps and sales of more than $100 billion, get tons of complaints about service, have betas of less than 0.5 (which suggests that they are stable companies), and currently pay dividends that are more than earnings.

Yet, they both have strong forward price-to-earnings ratios, which suggests that earnings will recover and that they will both continue to pay healthy dividends.  Although neither of these two companies are terrible investments, there are several international telecoms that present compelling investment opportunities, particularly as the European economy bounces back.

Mergers and acquisitions

AT&T Inc. (NYSE:T)’s recent acquisition of Leap Wireless International, Inc. (NASDAQ:LEAP) is a harbinger of what is to come, both on the domestic and international front.  In this instance, AT&T will benefit from creative accounting tricks because the fair market value of Leap’s assets is more than the adjusted tax basis of its assets.  AT&T will be able to shelter $155 million in taxable income per year — spread out over several years.  That is just one example of how larger companies benefit by acquiring smaller, unprofitable companies.  And creative accounting works both in the United States and abroad.

Verizon is the premier provider in the U.S.

Of the two U.S. telecom giants, I see Verizon Communications Inc. (NYSE:VZ) as the one that has a dominant competitive position.  That is because of Verizon’s critical point of difference — its very advanced 4G LTE network.  Because of its network reliability, Verizon is well-positioned to take market share from much weaker competitors such as Sprint Nextel Corporation (NYSE:S) and MetroPCS Communications Inc (NYSE:PCS) as well as to maintain (and grow) the highest margins in the industry.  Like many others, though, I love the company — just not the price.

Two telecoms that have dominant positions in Europe and are undervalued

Of the European (yes I consider Turkey to be part of Europe) telecom companies that I purchased, there are two of them that still have attractive entry points: Turkcell Iletisim Hizmetleri A.S. (ADR) (NYSE:TKC) and Telefonica S.A. (ADR) (NYSE:TEF).

To the best of my knowledge, Turkcell Iletisim Hizmetleri A.S. (ADR) (NYSE:TKC) is the only Turkish company traded on the NYSE.  That is unfortunate because Turkey is a one of the few emerging economies that still has a solid growth story.

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