Verizon (NYSE:VZ) reigns supreme atop the U.S. wireless industry, with more than 116 million retail connections. Yet hard-charging contender T-Mobile (NASDAQ:TMUS) has upended the industry with its innovative "Un-carrier" promotions and is rapidly gaining share.
So which of these rivals -- champ or challenger -- is the better buy today?
IMAGE SOURCE: GETTY IMAGES.
Financial fortitude
Let's first take a look at how Verizon and T-Mobile stack up in regards to financial strength.
Metric | Verizon | T-Mobile |
|---|---|---|
| Revenue | $126.03 billion | $40.60 billion |
| EBITDA | $47.05 billion | $10.69 billion |
| Operating income | $27.41 billion | $4.89 billion |
| Operating cash flow | $25.31 billion | $7.96 billion |
| Free cash flow | $7.48 billion | ($3.10 billion) |
| Cash | $2.08 billion | $1.22 billion |
| Debt | $117.51 billion | $30.91 billion |
Advantage: Verizon
Growth
Verizon may be the more financially powerful business, but T-Mobile has a clear edge in terms of growth. In fact, this better buy battle is particularly one-sided in regards to revenue and profit growth in recent years.
TMUS REVENUE (TTM) DATA BY YCHARTS
Wall Street expects this trend to continue. Analysts project that T-Mobile will grow its earnings per share by more than 28% annually over the next half-decade, fueled by new store openings, business account growth, and continued subscriber gains. Verizon, meanwhile, is forecast to increase its EPS by less than 6% annually during this same time, with challenges such as cord-cutting and pricing pressure from T-Mobile expected to weigh on its results. So, in terms of both recent past and expected future growth, T-Mobile is the clear leader.
Advantage: T-Mobile
Valuation
No better buy discussion should take place without a look at valuation. Let's now check out some key value metrics for these telecom rivals.
Metric | Verizon | T-Mobile |
|---|---|---|
| Trailing P/E | 6.56 | 11.81 |
| Forward P/E | 10.37 | 14.81 |
| PEG | 1.78 | 0.66 |
DATA SOURCE: YAHOO! FINANCE.
Verizon is the cheaper stock in terms of price-to-earnings ratio, with trailing and forward P/E ratios that are currently 44% and 30%, respectively, lower than that of T-Mobile. Yet T-Mobile is 63% less expensive on a PEG basis, which factors in its significantly higher expected EPS growth rates. Stock valuation should account for growth, so T-Mobile is the better bargain.
Advantage: T-Mobile
The better buy is...
Despite Verizon's superior cash flow generation, T-Mobile's greater growth prospects and more attractively valued shares make it the better long-term investment.
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