AT&T vs. Orange: Which Telecom Stock is a Better Buy?

AT&T Inc. (T) provides telecommunication, media, and technology services worldwide. The company operates through Communications; WarnerMedia; and Latin America segments. On the other hand, Orange S.A. (ORAN) provides a range of fixed telephony and mobile telecommunications, data transmission, and other value-added services internationally. It operates through France, Spain, and Other European Countries; Africa and the Middle East; Enterprise; International Carriers & Shared Services; and Mobile Financial Services segments.

Since last year, telecommunication has been in high demand as the need for advanced connected technologies increased due to the COVID-19 pandemic, with people spending most of their time at home. In addition, with the resurgence of COVID-19 cases and omicron variant scare, telecom services are expected to keep witnessing increasing demand as hybrid working is likely to dominate in the near term. Moreover, rising expenditure on the deployment of 5G infrastructures due to the shift in customer inclination toward next-generation technologies and smartphone devices are driving the telecom industry’s growth. According to a report by Grand View Research, the global telecom services market is expected to grow at a CAGR of 5.4% from 2021 to 2028. Therefore, both T and ORAN should benefit.

But which of these two stocks is a better buy now? Let’s find out.

Latest Developments

On October 19, 2021, T is expanding its global, managed Secure Access Service Edge portfolio to include a new offering. AT&T SASE with Cisco (CSCO) is a converged network and security management solution. Rupesh Chokshi, VP, AT&T Cybersecurity, said, “Through our collaboration with Cisco, we're offering an integrated, modern solution that addresses the connectivity and security demands of a multi-cloud, network environment while enabling innovation."

On November 23, 2021, Orange Belgium entered into an exclusive negotiation with Nethys to acquire 75% of the capital, less than one share of VOO SA. The acquisition of VOO will enable Orange Belgium to operate a very high-speed network in Wallonia and part of Brussels, thereby reinforcing the deployment of its convergent strategy at a national level.

Recent Financial Results

T’s revenue decreased 5.7% year-over-year to $39.90 billion for the fiscal third quarter ended September 30, 2021. However, the company’s operating income grew 16.4% year-over-year to $7.10 billion, while its net income came in at $5.90 billion, representing a 110.7% year-over-year increase. Also, its EPS came in at $0.43, up 110.3% year-over-year.

ORAN’s revenues decreased 0.4% year-over-year to €10.51 billion ($11.90 billion) for the fiscal third quarter ended September 30, 2021. The company’s EBITDAaL declined 0.7% year-over-year to €3.55 billion ($4.02 billion). Also, its eCAPEX came in at €1.71 billion ($1.94 billion), down 1% year-over-year.

Past and Expected Financial Performance

T’s revenue and EBIT grew at CAGRs of 1.8% and 5.3%, respectively, over the past three years. Analysts expect T’s revenue to decrease 1.8% in fiscal 2021 and 6% in fiscal 2022. However, the company’s EPS is expected to grow 5.3% in fiscal 2021. Moreover, its EPS is expected to grow at a rate of 3.6% per annum over the next five years.

On the other hand, ORAN’s revenue and EBIT grew at CAGRs of 1.1% and 1.7%, respectively, over the past three years. The company’s revenue is expected to increase 0.9% in fiscal 2021 and 1% in fiscal 2022. However, its EPS is expected to decline 42.5% in fiscal 2021. Also, ORAN’s EPS is expected to grow at a rate of 7.2% per annum over the next five years.

Profitability

T’s trailing-12-month revenue is 3.45 times what ORAN generates. T is also more profitable with a gross profit margin and levered FCF margin of 52.23% and 24.04% compared to ORAN’s 39.74% and 9.23%, respectively.

Furthermore, T’s ROA and ROTC of 3.72% and 5.23% are higher than ORAN’s 3.40% and 4.58%, respectively.

Valuation

In terms of forward EV/S, T is currently trading at 2.23x, 57% higher than ORAN’s 1.42x. Moreover, T’s forward EV/EBITDA ratio of 7.19x is 50.1% higher than ORAN’s 4.79x.

So, ORAN is relatively affordable here.

POWR Ratings

T has an overall rating of B, which equates to a Buy in our proprietary POWR Ratings system. On the other hand, ORAN has an overall rating of C, which translates to Neutral. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.

T has a grade of C for Quality. This is justified given T's 24.04% trailing-12-month levered FCF margin, 110.9% higher than the industry average of 11.40%. On the other hand, ORAN has a Quality grade of D, in sync with its 9.23% trailing-12-month levered FCF margin, 19.1% lower than the industry average of 11.4%.

Of the 20 Telecom - Domestic industry stocks, T is ranked #3. However, ORAN is ranked #30 of 47 stocks in the Telecom - Foreign industry.

Beyond what I’ve stated above, we have also rated the stocks for Growth, Stability, Value, Sentiment, and Momentum. Click here to view all the T ratings. Also, get all the ORAN ratings here.

The Winner

The telecom market is expected to grow with increasing demand for technology-based solutions to facilitate hybrid working. While both T and ORAN are expected to gain, it is better to bet on T now because of its higher profitability.

Our research shows that odds of success increase when one invests in stocks with an Overall Rating of Strong Buy or Buy. View all the other top-rated stocks in the Telecom - Domestic industry here. Also, click here to access all top-rated stocks in the Telecom - Foreign industry.

T shares were trading at $23.23 per share on Thursday afternoon, up $1.00 (+4.50%). Year-to-date, T has declined -13.21%, versus a 23.74% rise in the benchmark S&P 500 index during the same period.

Nimesh Jaiswal's fervent interest in analyzing and interpreting financial data led him to a career as a financial analyst and journalist. The importance of financial statements in driving a stock’s price is the key approach that he follows while advising investors in his articles.

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