By Matt McCallSep 24, 2017
The telecom sector – specifically the wireless service providers – has been on the move this week on news that T-Mobile US (TMUS) and Sprint (S) are once again getting close to a merger. These rumors have been floating around Wall Street for over a year now and the speculations have always proved to be premature.
More leaks hit the wires Friday morning as an insider claimed that the two companies had made more progress. While both stocks gapped higher, the gains were muted because at this point these rumors are like the girl who cried wolf.
Whether or not we’re hearing truth or fiction this time around, there’s no question the speculation has given three of the biggest players in the space a much-needed short-term boost. Let’s take a closer look at each.
TMUS rallied on heavy volume to its best close in three months on Tuesday. However, the breakout was wiped out the following day. Going forward, the movement in the stock will be determined largely by any rumors or lack thereof. The simple fact that TMUS fell two weeks ago after its CFO failed to comment on the possibility of a merger at a Goldman Sachs conference shows how much the rumors can sway it.
In the end, I do believe that a deal will get done. The combination is in the best interest of both companies and it will result in synergies that will ultimately lead to accretive cost savings. But aside from that there are other reasons to like T-Mobile right now, including its expansion into narrowband as a play on the Internet of Things (IoT). As a result, I like this stock and expect higher prices in the near term.
Sprint also rallied on the rumors on Tuesday, but unlike TMUS its chart remains ugly. It has been in a consistent downtrend since the beginning of the year, and fundamentally it’s expected to keep losing money. I don’t see it coming out a winner in the wireless battle unless it merges with T-Mobile, so at this point I am avoiding the stock.
The third big player in this space is Verizon (VZ), which is more of a diversified telecommunications play that has a wireless division. Like S and TMUS, VZ was also able to rally with the entire sector on Tuesday and closed at its best level since April.
Looking at the technicals, the chart of the stock is okay. It’s not a screaming buy or sell at this time, which is why I’m not pulling any triggers.
The fundamentals are the biggest concern with Verizon. After earning $3.87 a share in 2016, Wall Street is expecting the company to earn $3.78, $3.83, $3.84 and $3.76 a share in 2017, 2018, 2019 and 2020, respectively. Near zero growth over the next four years isn’t good, and it suggests that the stock will continue to flounder for the time being. As a result, there is no reason to be a buyer here.
In the coming months, it will be extremely important to watch how the launch of the new iPhones will affect the wireless telecom companies. Because the price of the iPhone X is getting to eye-popping levels, it will be interesting to see how it is received by the market. That could be a major factor in forward earnings for the wireless companies, so for now the best move is to wait and see.
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