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As cellular phones became more common and as technology emerged that combined the ability to send data as well as voice via this infrastructure, telephone companies expanded their product offerings to include content as well as infrastructure. Today, telecommunication giants such as AT&T and Verizon have a global reach in Internet, cellular communications and other technologies, but they are increasingly operating in mature markets that should be characterized by declining profit margins and slower revenue growth. This research considers financial performance for both of these companies over the past three years as well as evaluating both companies in terms of investing attractiveness and their effectiveness in operating in a mature market.

About AT&T

AT&T is a holding company that offers telecommunication products and services throughout the world. These include wireless communications, local landline service (exchanges), long distance service, Internet/broadband service, equipment, video service and wholesale services. The company is organized into three business segments: wireless, wire line and other. The wireless subsidiaries provide service in the United States as well as in a significant number of other countries. The wire line business segment includes the company's U-verse television and high-speed broadband service as well as its landline offerings. Other includes operator services as well as miscellaneous corporate services. At the end of 2012, AT&T had more than 107 million wireless subscribers using contract as well as prepaid service options. More than half of the company's revenues come from its wireless operations(Reuters, 2013). In September 2013, AT&T purchased unused spectrum from Verizon, one of its main competitors (Musil, 2013).

About Verizon

Like AT&T, Verizon is a holding company that operates through subsidiaries. It also operates both wireless and wire line business segments, but does not provide operator services. Verizon provides wireless devices, wireless infrastructure, broadband services, Internet services, and other services to both consumer and business customers. The company has operations in more than 150 countries around the world. The company has formed strategic partnerships with a number of different companies, including General Motors. It operates the technology infrastructure for OnStar provided on cars from General Motors. Verizon has one of the largest 4G LTE networks as well as a large fiber optic network (Reuters, 2013).

AT&T Financial Data

Following is key financial data for AT&T for 2010-2012. The company has seen a decline in equity as its liabilities have increased significantly during that time. There was a year-to-year increase of 5 percent in the company's liabilities from 2010 to 2011, and of 9 percent from 2011 to 2012. AT&T had a significant decline in net income from 2010 to 2011, but picked up again in 2012, but not to the 2010 levels. As expected in a mature industry, the company's sales have increased only slightly during the last three years, but the cost of goods sold increased significantly from 2010 to 2011. This resulted in a decline in the companies after tax income in 2011, although this increased again in 2012. Earnings per share also fell dramatically from 2010 to 2011. AT&T had the same number of shares outstanding during that time, so shareholder equity has also fallen over the three-year period, meaning that shareholders are worse off when considered from this perspective compared to 2010 (2012 AT&T Annual Report, 2013).

While shareholders may be worse off in terms of the book value of their investment, the stock price increased 81 percent from its 2010 low to its 2012 high, with movement of 10 percent and 23 percent in the stock's high price in 2010-2011 and 2011-2012, respectively. On October 1, the stock closed at 34, down almost 10 percent from its 2012 high, but still higher than its 2011 high and its 2012 low. When considered as an investment, the stock has performed adequately over the past three years.

The stock performance reflects the market's perception that the downturn in profits may well be due to the write-off that AT&T had to take when its proposed merger with TMobile fell through (Svensson, 2012). Failure to merge resulted in the company having to take a significant loss as its paid money to T-Mobile, but this was a one-time event that investors seemed to have accepted in their pricing of the stock since that time.

Verizon Financial Data

Following is financial data for Verizon for 2010-2012. The company has seen a slight decline in equity but not to the same degree as AT&T during the same period. Sales increased year-to-year at a rate of four percent each year, and net income increased from 2011 to 2012 at a rate of four percent, as well. An initial review of the financials puts Verizon slightly ahead of AT&T; the ratio analysis (below) provides greater insight (Verizon, 2013).

Verizon saw stronger increases in sales over the last three years and also had equity that remained almost unchanged. Verizon's stock, however, outpaced AT&T's during the three year period although both had 2010 low prices that were very close to each other. Verizon has seen much greater price appreciation than AT&T during that time. On October 1, Verizon closed at 46.99, above its 2012 high price. Note that in the following list of data, earnings per share excludes earnings that go to the no controlling interest and includes only earnings attributable directly to Verizon.

Ratio Analysis

Liquidity ratios provide insight into a company's ability to meet its short-term obligations. The current ratio is the company's current assets divided by current liabilities. The two companies have similar abilities to meet their obligations, suggesting that as two of the largest companies in the industry, they are setting the benchmark for the current ratio.

An account receivable turn is sales divided by accounts receivable and indicates how well the company is able to realize revenue from its receivables. Both AT&T and Verizon are within a day of each other with turns of 9 days for Verizon and 10 days for AT&T, and both have remained steady for the last three years, although AT&T has seen a slight increase.

Solvency can be measured by the debt to equity ratio. Verizon's debt to equity ratio has remained relatively steady from 2010 to 2012, while AT&T increased somewhat, indicating that AT&T is taking on more debt, slightly, than Verizon.

Return on equity is a profitability ratio. Verizon's is significantly lower than AT&T's return on equity ratio ranging from 2.9 percent to 1 percent compared to AT&T's 17 percent falling to 7 percent.

Evaluation of Performance / Stock Pick

Both companies are strong competitors and compete with each other through their various subsidiaries. Both provide wire line and wireless services with broadband capabilities as well as content, and both companies must invest in their infrastructure on a regular basis in order to maintain their competitive position. Both companies also compete in what is a mature market with little opportunity to find entirely new customers. In terms of wireless users, new customers come from existing carriers rather than from customers new to the wireless market, which is different from the strong growth years of the market. There continues to be potential for stronger growth in the international markets, but competition can be intense there, as well. While both are strong companies with strong revenues, both have low profit margins and lower profitability measures. Because of the ongoing investment required to maintain the companies' infrastructure and the high level of competition in this field, as well as the relative maturity of the market, investors who are seeking strong returns may do well to invest in different technology companies rather than one of these two. If someone were to invest in one of these, Verizon seems to be the slightly better investment based on the information provided above, and the fact that it has the technological advantage that gave it the ability to sell some of its spectrum to AT&T.

It is interesting to note that both companies' stock prices reflect a far greater price appreciation than their financials would seem to support. Both companies have seen only slight increases in their revenues, and their profit margins are relatively low. Yet the stock prices have gone up significantly over the past three years. There may be some speculative interest in these companies, or there may be an indication that the price cannot be supported much longer with the underlying financial performance.

References

2012 AT&T Annual Report. (2013). Annual Report. Retrieved September 30, 2013, from AT&T: http://www.att.com/gen/investor-relations?pid=9186

Musil, S. (2013, September 10). AT&T Completes Acquisition of Verizon Wireless Spectrum. Retrieved September 30, 2013, from CNet: http://news.cnet.com/8301-1035_3-57602346-94/at-t-completes-acquisition-of-verizon-wireless-spectrum/

Reuters. (2013). AT&T Inc. Retrieved September 30, 2013, from Reuters (US): http://www.reuters.com/finance/stocks/companyProfile?symbol=T.N

Reuters. (2013). Verizon Communications Inc. Retrieved September 30, 2013, from Reuters (US): http://www.reuters.com/finance/stocks/companyProfile?symbol=VZ.N

Svensson, P. (2012, January 26). Massive $6.68 Billion Loss On T-Mobile Deal Collapse, iPhone Subsidies, Pension Adjustments. Retrieved October 7, 2013, from Huffington Post: http://www.huffingtonpost.com/2012/01/26/att-q4-2011_n_1233533.html

Verizon. (2013). 2012 Verizon Annual Report. Retrieved September 30, 2013, from Verizon: http://www.verizon.com/investor/DocServlet?doc=vz_ar_2012.pdf