In a market that is frothy, overvalued, and volatile, it is extremely difficult to pick stocks that will outperform broader indices. However, if you look closely you might find companies that tend to perform well across most business cycles.
The telecom sector is considered largely recession-proof, as the suite of services offered by these companies is in demand in good times and bad. So, it makes sense to consider stocks such as T-Mobile (TMUS) and AT&T (T) right now.
While TMUS stock is up 11.7% in 2022, AT&T stock has gained 7% year-to-date. Let’s see which is a better stock to buy and hold for 2022 and beyond.
T-Mobile
In Q1 of 2022, T-Mobile grew total accounts by 348,000 and postpaid customers by 1.32 million. Its postpaid phone churn fell by basis points to 0.93% while its broadband offering allowed its customer base to expand by 338,000 to touch 984,000 customers.
So, the company managed to increase revenue by 6.6% while adjusted EBITDA and free cash flow surged by 10% and 26% respectively, year over year.
Due to its stellar results in Q1, T-Mobile raised full-year guidance for EBITDA and net additions. Further, it emphasized the company continues to benefit from synergies arising out of the Sprint acquisition which was completed in 2020.
T-Mobile expects to allocate $100 million to build out robust 5G infrastructure but still raised cash flow estimates by $50 million for 2022.
Initially, T-Mobile forecast cash flows to rise between $7.1 billion and $7.6 billion in 2022, compared to $5.6 billion in 2021. In fact, free cash flows might also grow to $13 billion in 2023, providing the company with enough financial flexibility to grow organically, as well as via acquisitions.
AT&T
Shares of AT&T fell from $30 at the end of 2019 to a multi-year low of $16.6 at the end of 2021. At the time of writing, AT&T stock is trading closer to $20, as the company sold off a bulk of its assets in the entertainment space and slashed its dividends.
Last month, AT&T completed the merger of WarnerMedia with cable TV entity Discovery to form Warner Bros. Discovery which also brought an end to the divestiture of the telecom giant's entertainment assets.
AT&T can now focus on its core operations in the telecom space. In 2021, AT&T's net addition for its postpaid subscribers stood at 3.2 million which was cumulatively more than the previous 10 years. In Q1 of 2021, its net additions stood at 691,000 which was again the highest additions for Q1 in the last decade.
Similar to T-Mobile, AT&T is also gaining traction in the broadband segment, ending Q1 with 6.3 million connections, compared to 5.2 million in the year-ago period. On a Pro-forma basis,
AT&T sales were up 4.3% year over year at $118.2 billion in 2021. In Q1, pro forma sales rose by 2.5% to almost $30 billion.
The verdict
T-Mobile is valued at $162 billion by market cap and is trading at two times forward sales. Comparatively, its price to 2022 earnings multiple is steep at 48x but the company is on track to expand earnings at an annual rate of 59% in the next five years.
Comparatively, AT&T is valued at $142 billion by market cap and is valued at 1.1x forward sales. Its price to 2022 earnings multiple is also quite attractive at 7.7x given the stock offers investors a tasty dividend of 5%.
Despite AT&T’s extremely low valuation, I believe T-Mobile is currently the better investment. Its cash flow expansion and earnings growth will provide investors with an opportunity to derive outsized gains over time.
TMUS shares were trading at $129.55 per share on Friday morning, down $0.01 (-0.01%). Year-to-date, TMUS has gained 11.70%, versus a -13.32% rise in the benchmark S&P 500 index during the same period.
About the Author: Aditya Raghunath
Aditya Raghunath is a financial journalist who writes about business, public equities, and personal finance. His work has been published on several digital platforms in the U.S. and Canada, including The Motley Fool, Finscreener, and Market Realist.
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