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Better Buy: AT&T Inc. vs. T-Mobile


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John Legere is quite all right with seeing AT&T (NYSE: T) buy Time Warner (NYSE: TWX), on one condition. The T-Mobile (NASDAQ: TMUS) CEO says Washington should consider "making AT&T divest Batman," a superhero in Time Warner's cave.

In all seriousness, he notes that AT&T's efforts in entertainment open the door for T-Mobile to continue taking away its wireless subscribers. With T-Mobile adding new subscribers by the millions every quarter, its growth is highly enviable. But AT&T still generates tons of cash flow that it uses to make big acquisitions and pay a dividend to shareholders.

Let's take a closer look at each stock to determine which is a better buy right now.

A growing pure play in wireless

T-Mobile primarily focuses on retail wireless customers. It's the only wireless service provider growing both its prepaid and postpaid phone subscriber bases over the past four quarters. Last quarter, the company added 851,000 postpaid phone customers and 684,000 prepaid customers. It's added over 1 million total customers in each of the past 14 quarters.

What's more, T-Mobile is rapidly moving in on more high-value customers, encroaching on AT&T's bread and butter. At the beginning of September it started ushering customers toward its new unlimited-data plan, called T-Mobile One. In the third quarter, it saw its average service revenue per subscriber climb to $48.15, up 1.6% sequentially on an adjusted basis. Comparatively, AT&T notches $59.64 per postpaid phone subscriber, but that's down 0.3% sequentially and 1.9% year over year.

It's also managing to increase the number of family plans in its subscriber base. Connections per account increased to 2.78, moving closer to its high-end competitors. Family plans generally exhibit lower churn. Last quarter, T-Mobile's postpaid phone churn rate came in at 1.32%. That should decline as it adds more family plans. AT&T's churn rate was just 0.97% last quarter.

A growing media empire

AT&T has transformed from the country's largest wireless carrier into the country's largest pay-TV provider, after acquiring DirecTV. Now it plans to acquire Time Warner, providing it with more vertical integration.

Neither its wireless business nor its entertainment division are in great shape. It lost 3,000 pay-TV customers last quarter and added just 21,000 postpaid wireless customers. It's managing to hold on to its higher-value customers, however. Consolidated revenue grew 4.6% to $40.9 billion last quarter, and its wireless service EBITDA margin climbed to an all-time high of 50.1%.

Nonetheless, AT&T is struggling to grow organically, relying heavily on its DirecTV acquisition. Its plan is to build an ecosystem around entertainment that fuels subscriber loyalty to AT&T. For example, it only allows DirecTV subscribers to subscribe to unlimited data plans. Additionally, it's planning to let mobile subscribers stream its upcoming DirecTV Now service without having the data count against their data caps. It plans to do similar things with Time Warner.

A look at valuation

Both companies trade for similar enterprise multiples. T-Mobile's 6.3 EV-to-EBITDA multiple is just slightly below AT&T's 6.4 multiple.

At the same time, the two companies offer completely different strengths. T-Mobile is expected to rapidly grow earnings going forward. Analysts project average earnings growth of 28% through the next five years. Comparatively, AT&T earnings per share are expected to climb just 8% on average over the next five years. That's reflected in their respective P/E ratios of 32.8 for T-Mobile and 12.8 for AT&T.

AT&T pays a dividend that yields 5.3% at its current price, while T-Mobile doesn't pay a dividend at all. That's an important factor to many investors considering telecom companies.

However, if you're looking for yield, there are better options with stronger fundamentals than AT&T, even in the telecom industry. But nobody else in the industry is executing at the level of T-Mobile, and the results show in both its subscriber number growth and its earnings growth. As such, T-Mobile is a better buy than AT&T right now.

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Adam Levy has no position in any stocks mentioned. The Motley Fool recommends Time Warner and T-Mobile US. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.