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AT&T Beats Verizon With Cash: Analyst's Toolkit

While AT&T and Verizon shares have similar P/E ratios, AT&T has been bringing in more cash.



) -- With all the hype about







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iPhone, it's hard to discern which wireless provider is the better bet:


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Verizon Communications

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There's no reason to let snarky ads or product reviews influence your investment decisions when there are measures that can help identify the stronger company in the competitive world of mobile technology. Here's a primer for sizing up the stocks:

Forward price-to-earnings ratio:

AT&T: 12.5, Verizon: 12.3

The companies' forward P/E ratios are almost the same. While this metric doesn't give either company an edge, it shows that both stocks are undervalued based on their projected earnings. The average P/E for their peers is over 36, so AT&T and Verizon look cheap by comparison.

PEG ratio:

AT&T: 2.05, Verizon: 2.55

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The picture of these companies dims as you look at their

PEG ratios

(price/earnings to growth). A PEG of 1 is suppose to indicate a fair price, but these stocks top 2. AT&T's PEG ratio is about 20% lower than Verizon's, making AT&T more appealing because its price is in line with its potential growth.

The companies' low P/E and high PEG ratios suggest that analysts are predicting slow growth. It could mean that the mobile technology market is reaching saturation, and that companies will need to target each other's customers rather than find new accounts.

Sustainable growth:

AT&T: 2.3%, Verizon: 0.84%

The companies' sustainable growth levels reflect their limited prospects. AT&T clearly trumps Verizon in this category, yet both figures are low because of the companies' high payout ratios. While this could be a good sign for investors seeking dividend income, these companies might be the wrong picks for people looking for big gains.

Weighted average cost of capital:

AT&T: 7.6%, Verizon: 6.8%

AT&T uses less debt in its capital structure than Verizon, leading to a higher weighted average cost of capital. Because these companies can access credit with low rates via the debt markets, it may make sense for AT&T to finance its operations through borrowing so that it can benefit from increased leverage. For companies with secure revenue streams, this strategy can lead to bigger profits with little added risk.

Present value of growth opportunities:

AT&T: $2.74 (10.4%), Verizon: $2.82 (9.3%)

While future opportunities add little to the share prices of either company, potential growth accounts for a slightly bigger portion of AT&T's stock price. After looking at this string of unimpressive metrics, one starts to wonder if either stock is worth buying. Neither seems to have positioned itself to benefit from an economy recovery.

Free cash flow to equity:

AT&T: $11.98 billion (year-to-date), Verizon: negative $3.2 billion

There it is. AT&T crushes Verizon in terms of free cash flow. AT&T is gushing with money, allowing it expand its business, invest in network improvements and make more feel-good commercials. In addition to its strong free cash flow to equity, AT&T generated $12 billion in free cash during the first three quarters.

Verizon, on the other hand, had negative free cash flow in the first and second quarters. The company managed to take in cash in the third quarter, but it wasn't enough to erase the earlier losses.

These companies are evenly matched, but AT&T's strong cash flow will allow it to maneuver more easily in the recovery. The ability to spend more than competitors and implement bold plans should never be undervalued. Even though Verizon operates the industry's top network, AT&T might be the better investment.

-- Reported by David MacDougall in Boston.

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Prior to joining Ratings, David MacDougall was an analyst at Cambridge Associates, an investment consulting firm, where he worked with private equity and venture capital funds. He graduated cum laude from Northeastern University with a bachelor's degree in finance and is a Level III CFA candidate.