BofA reinstates coverage on top U.S. telecoms

Bank of America has resumed coverage of AT&T, Verizon, and T-Mobile US, highlighting the distinct strategies and growth potential of each company within the telecom sector, which is often viewed as stagnant by institutional investors.

AT&T received a "buy" rating with a target price of $32, driven by its solid operational momentum, strong mix of wireless and fiber resources, and a focused capital return strategy that positions it favorably for growth.

Verizon is rated "neutral" with a price target of $45, recognized for its strong subscriber base and balanced strategies but facing competitive challenges that may pressure its margins due to increased promotional spending.

T-Mobile US also holds a "neutral" rating with a target price of $255, noted for its subscriber growth and financial performance but is seen as vulnerable to competition, particularly from cable companies, as it depends heavily on net subscriber increases for earnings growth.

Recommendation Rating: Telecom Sector Coverage Analysis

Bank of America has resumed its coverage of three major telecom companies: AT&T (NYSE: T), Verizon (NYSE: VZ), and T-Mobile US (NASDAQ: TMUS) as of Monday.

Analyst Michael Funk notes that the telecom sector is often perceived as uniform, leading to relatively low investment from institutional investors who regard it as a stagnant industry. However, he argues that the leading telecoms in the U.S. possess distinct attributes shaped by their strategic decisions, mergers and acquisitions, focus on metrics, capital return policies, and potential for growth and risks.

For AT&T, which was reinstated with a "buy" rating and a target price of $32, Bank of America identifies a well-rounded strategy aimed at driving growth. With robust operational momentum, an advantageous mix of wireless and fiber resources, and a focused approach to capital return projected over the coming years, BofA anticipates that AT&T’s stock will perform more similarly to T-Mobile than Verizon.

"Fiber forms a crucial component of AT&T’s long-term plans. The company's extensive fiber footprint, combined with its wireless assets, positions it effectively to thrive in a competitive market," stated BofA.

Verizon, now rated as "neutral" with a price target of $45, is recognized for its balanced approach, featuring a strong wireless subscriber base, capital return strategy, and a fiber development plan. Its cable MVNO serves as a financial buffer against competitive pressures from the cable sector. In the short term, BofA predicts that Verizon will encounter competitive challenges likely leading to heightened promotional spending, which could erode margins.

"Verizon’s emphasis on network quality, enhancement of its wireless offerings through added incentives, and careful promotional strategies should appeal to investors in the medium to long term," remarked BofA. "However, we foresee potential challenges in postpaid growth in the near future, as cable companies intensify their competitive strategies and T-Mobile might respond to maintain their net addition targets."

T-Mobile US, reinstated with a "neutral" rating and a target price of $255, is acknowledged for its effective execution and leadership in subscriber growth. However, its dependence on subscriber increases for earnings growth may render it vulnerable amidst escalating competition within the maturing industry and a more aggressive stance from cable providers.

"T-Mobile has excelled in securing postpaid phone net additions, and has displayed significant growth in revenue, EBITDA, and free cash flow," the research firm commented. "Nevertheless, we believe T-Mobile will likely adapt to the competitive pricing and promotional strategies employed by cable companies, given its ambitious target for postpaid net additions of 5.5-6 million and the critical nature of this metric for investor confidence."