Analysis: AT&T shares look cheap compared with Verizon’s

By Sinead Carew

NEW YORK (BestGrowthStock) – Shares of AT&T Inc (T.N: ) have fallen so much on fears that it could lose its iPhone exclusivity that analysts now say the carrier is a better buy than rival Verizon Communications Inc (VZ.N: ).

Verizon is widely expected to get rights to sell Apple Inc (Read more about Apple stock future.)’s (AAPL.O: ) smartphone next year, a move that could help it steal customers from AT&T and other carriers.

But some analysts say Verizon’s stock is overvalued, as markets have not yet factored in an earnings hit from its recent sale of some rural landlines.

Meanwhile, AT&T is looking undervalued, according to analysts who think fears of a mass exodus of customers to Verizon are overblown, even though Verizon’s network is generally perceived to be better than AT&T’s. Many customers who just bought the iPhone 4, for example, are locked into two-year contracts with AT&T.

“Going into the second-quarter report, we like AT&T better than Verizon,” said Wells Fargo analyst Jennifer Fritzsche.

She said AT&T should be able to retain more iPhone customers than people think, and she also expects it to gain higher profit margins than Verizon from big business customers because of the networks it uses to serve those customers.

AT&T shares trade at around 11 times forecast 2010 earnings, compared with Verizon’s 12 times multiple, according to Thomson Reuters I/B/E/S. But Verizon’s valuation does not yet reflect the recent phone line sale to Frontier Communications Corp (FTR.N: ), according to analysts.

Verizon has said it expects the sale to be “modestly dilutive to earnings in the first full year after closing.” It plans to explain the effect on future earnings when it reports its second-quarter results July 23.

Several analysts also said AT&T’s full ownership of its wireless business makes it more attractive than Verizon, which has only a 55 percent share in its Verizon Wireless venture with Vodafone Group Plc (VOD.L: ).

“Relative to AT&T, it’s more expensive. I don’t think it should be,” Hudson Square analyst Todd Rethemeier said of Verizon. “They’re similar businesses, except AT&T owns the whole of its wireless business.”

There may be a knee-jerk increase in Verizon’s share price and a decline in AT&T’s share price should an official announcement be made about the iPhone, but that won’t last when investors see that the number of customers switching is limited, he said.

TEMPORARY SETBACK

Over the past few months AT&T shares have fallen almost 7 percent, primarily due to the specter of the loss of exclusivity for the iPhone.

Bernstein analyst Craig Moffett said there is a “huge pent-up demand for a Verizon iPhone” and AT&T could see a valuation dive if a Verizon iPhone hurt its revenue.

“If valuation were all that mattered, AT&T would be the clear winner; but emotions matter in stock valuations as well,” Moffett said. “Whether it’s cheap already or not, it’ll get cheaper, even if it’s only a temporary revenue loss.”

Apple has declined comment on iPhone distribution plans, but a bevy of media and analyst reports have fueled speculation that Apple will add Verizon as a partner in 2011.

In the meantime, analysts say the success of the latest iPhone 4, which hit stores June 24, will be crucial to AT&T because the two-year contracts that come with iPhone will help delay any customer switches should Verizon get the device.

Barclays analyst James Ratcliffe estimated that AT&T will report 900,000 net contract customer additions for the second quarter thanks to iPhone. It posts quarterly results July 22. In comparison, he sees 500,000 net Verizon additions of customers who sign long-term contracts.

Analysts estimated that about 17 million of AT&T’s 87 million cellphone users have iPhones.

Ratcliffe sees between 500,000 and a million consumers switching to Verizon from AT&T as a result of the change.

“It’s 5 or 6 percent of its iPhone base, so it’s a sizable number, but its not a seismic change,” said Ratcliffe.

David Dixon, an analyst with FBR Capital markets, said the end to iPhone exclusivity would be just a “temporary setback for AT&T.” He thinks iPhone users would not notice a big improvement in service on the Verizon Wireless network compared with AT&T since the iPhone requires a lot of capacity on any network.

(Reporting by Sinead Carew; editing by Tiffany Wu and Gerald E. McCormick)

Analysis: AT&T shares look cheap compared with Verizon’s