The New Kings of Telecom

06/01/2009 12:00 pm EST

Focus: STOCKS

Roger Conrad

Founder and Chief Editor, Capitalist Times

Roger Conrad, associate editor of Personal Finance, says Verizon and AT&T have emerged as the big winners in the telecommunications business.

Without a doubt, Verizon (NYSE: VZ) and AT&T (NYSE: T) have emerged as the industry’s kings. Their “sleepy” managements recognized early on the potential of wireless phones and have never flagged in growing their reach and range of services.

For more than a decade, detractors have focused on the steady erosion of their traditional phone businesses rather than the outsized growth of their wireless businesses. As a result, they’ve missed the point that not only are new services growing faster, but they’re every bit the 21st century essential service that traditional phones were in the 20th.

First-quarter numbers retell the tale. Verizon’s headline earnings, absent one-time costs for the Alltel merger, came in at 63 cents, up 10.5% and well above the Street’s 61-cent projection. And despite $3.7 billion in capital expenditures to build out the network, free cash flow was $2.7 billion, double last year’s levels.

[Meanwhile, Verizon] passed AT&T in wireless subscribers for the first time since the latter’s merger with BellSouth. The company’s wireless division contributed 56.6% of total sales, up 29.6% on the year as it added 28.8% more customers for a total of 86.6 million users.

Customer turnover, or “churn,” remained at just 1.14%, still the lowest level in the industry. Moreover, data revenue—the category that includes all new wireless applications—rose by an explosive 56.2%.

As has been the case for many years now, the company lost traditional local phone service customers. But it also added 299,000 net new customers for its state-of-the-art FiOS TV service and a record 298,000 net new FiOS Internet customers. The FiOS base is now at 2.2 million FiOS TV customers and 2.8 million FiOS Internet customers.

AT&T posted steep pension expenses due to the market correction of about a nickel a share. Earnings per share, however, still came in at 53 cents, and the numbers behind it looked even better. Free cash flow, for example, was $4.6 billion, up from $700 million a year ago.

Wireless operations were the star, paced by the company’s immensely profitable partnership with Apple (Nasdaq: AAPL) and its iPhone. Post-paid subscriber rolls rose 24%, and cash flow margin surged to 40%. Those numbers are particularly impressive in view of the effective subsidy AT&T has used to encourage adoption of the iPhone. Data revenue, meanwhile, rose 39%.

On the wireline side, the company’s U-verse platform added 284,000 customers in the quarter, an actual acceleration from last year’s pace. Penetration has now hit double digits in all major markets, and attach rates ran above 90%, with overall penetration nationwide at 13%. Even the pace of basic wireline losses diminished, and actual revenue per household rose by 2%.

Verizon and AT&T are cheap, yield north of 6%, and are Buys up to $35. (Verizon closed above $29 Friday, and AT&T closed at around $24.50—Editor.)

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