Multimedia Wars: To The Victors, Go The Investment Spoils

The conventional distinctions that once separated cable, television, movies, radio, telecommunications, and the Internet have blurred. These venues increasingly form an interconnected, cross-owned and transnational “borg.” And as Star Trek’s Borg Queen warned: Resistance is futile.

Well-positioned companies can reap huge riches in this multimedia landscape, but fast-changing technology and fickle consumer tastes make investing a risky proposition.

Below, I examine one of the strongest combatants in the multimedia wars. The stock of this telecom giant is a compelling growth-and-income play. I also pinpoint a likely loser that you should shun at all costs.

The next round of consolidation…

Despite the colorful panoply of familiar brand logos, most Americans would be shocked to learn how few parent corporations govern the multimedia space.

As consolidation continues apace, these behemoths keep getting bigger in size and smaller in number.

Ari Charney, chief investment strategist of Utility Forecaster, asserts that a tsunami of consolidation is gathering force:

“Brace yourself: In just two weeks, the cable, media, and telecom landscape could change forever.

On March 30, the quiet period for participants in the government’s latest spectrum auction will end, and that’s when a flurry of dealmaking could begin.

Aside from the usual empire building, intense competition and sweeping technological changes will drive the next round of consolidation. In other words, M&A is no longer optional — it’s becoming existential.

Indeed, Verizon Communications (NYSE: VZ) just launched the latest campaign in its ongoing price war with fellow wireless giants AT&T (NYSE: T), T-Mobile US (NSDQ: TMUS), and Sprint (NYSE: S).”

Revenge of the cord-cutters…

Linda McDonough, chief investment strategist of Profit Catalyst Alert, says all media are undergoing a massive and historic shift:

“The days of entertainment being delivered solely via television are long gone…

After investing billions of dollars in cable and broadband infrastructure, telecommunication companies are finding their customers adopting new viewing habits. A generation of ‘cord cutters’ is opting for a la carte or unbundled pay TV options. Consumers are streaming video over laptops, tablets, smartphones and even watches…”

Ari Charney elaborates: “As cable and telecoms increasingly become distributors of video content, they’ll inevitably want a bigger piece of the high-margin action.

So we would expect to see more deals that pursue vertical integration (i.e., content plus distribution), in addition to those that expand the means of distribution (i.e., cable plus wireless).”

Poised to emerge a big winner in this Darwinian struggle is Verizon, a longtime denizen of the Personal Finance Income Portfolio.

Verizon re-launched an unlimited data plan in February, prompting a costly price battle with rivals. However, the nation’s largest wireless company boasted an overall profit margin in 2016 of 10.4%, far ahead of its peers and giving it the financial wherewithal to stick with its pricing strategy.

Our analysts also expect Verizon to put its enormous cash hoard to work, by enhancing the quality of its coverage through network upgrades and securing vital spectrum.

Since it was added to the PF Income Portfolio on August 17, 1987, Verizon has generated a whopping total return of 1,038%. The current dividend yield is a juicy 4.60%.

Sprint: Our verdict is harsh…

We now turn our pitiless gaze to the surest loser: Sprint.

Some analysts are bullish on telecom stock Sprint, but that’s just delusional. This stock is heading one way and that’s down. Our advice, in a word: Sell.

Sprint’s shares have soared 136% over the past 12 months, as bullish analysts naively predict that the telecom has turned itself around. However, the only thing that shareholders should expect in 2017 from this beleaguered telecom is a crash to earth.

Sprint’s valuation has moved higher over the past 12 months due to ostensibly improved financials, greater subscriber growth and recent profits. Seems like a turnaround is in the offing, right? Don’t bet on it.

Let’s look beneath the company’s accounting legerdemain.

Sprint has a huge off-balance-sheet debt that Japan-based parent company SoftBank Group (OTC: SFTBF) created to keep its balance sheet weakness from frightening off investors.

Sprint is shouldered with a total debt of $37.3 billion, for a troubling debt-to-equity ratio of 196.43, compared to 150.5 for its industry. Sure, it’s off the balance sheet, but all of that debt and interest still has to be paid.

The investment herd will soon realize the full ramifications of that onerous debt, as well as Sprint’s inability to grow fast enough to sufficiently service it. When that happens, the stock will collapse. The fact is, SoftBank bought Sprint as part of an ambitious but ill-conceived plan to diversify the bank’s portfolio.

SoftBank in 2013 paid $22 billion for a controlling stake in Sprint, at the time the number three U.S. wireless operator. Since then, the bank’s investment has lost $7.3 billion in value and Sprint has dropped to the fourth-largest carrier.

Sprint faces insurmountable headwinds. It’s considerably smaller than telecom rivals Verizon and AT&T and operates an aging wireless network that’s difficult to sufficiently upgrade and expand when the company is saddled with such an ugly balance sheet.

A saturated U.S. telecom market and destructive price wars with larger competitors have left Sprint in ruins. Through various unconventional loans brokered by parent SoftBank, Sprint has been buying time with creditors. But it’s simply a matter of robbing Peter to pay Paul.

Meanwhile, aggressive promotional programs and discounts to win new customers from rival carriers continue to result in high cash burn and heavy losses.

In a move that bodes poorly for future growth, Sprint decided to forego the Federal Communications Commission’s 600 MHz low-band airwaves auction. The move saved precious cash but restricted the company’s ability for network upgrades and expansion.

Stick with PF Income Portfolio pick Verizon… and disconnect from Sprint.

Want to know more about the multimedia wars and the consequences for investors? Send me a letter: — John Persinos

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