Inflation is everywhere. Apart from the cell phone bill

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Inflation is everywhere. Apart from the cell phone bill

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And telecom stocks are paying for it.

Even though Americans pay more for almost everything else, the average price of mobile plans continues to decline. This is largely due to the intense competition between Verizon (VZ)parent company of CNN AT&T (T.) And T Mobile (TMUS). Price wars are more prevalent than ever, even after T-Mobile’s merger with Sprint in 2020, a deal some feared would lead to greater pricing power for the industry giants.

Falling wireless bills are “in stark contrast to prevailing inflation that appears to be everywhere,” analysts at Wall Street research firm MoffettNathanson wrote in a report entitled “The Industry Inflation Forgot.”

And it shows in the financial results. AT&T, Verizon and T-Mobile all reported fourth-quarter declines in average revenue per user (ARPU), a key pricing metric in the wireless industry. AT&T saw the largest decline at 1.1%, while the prices of Verizon and T-Mobile each fell less than 1%.

Analysts say this may be the main reason Verizon and AT&T stock didn’t take off this year. Verizon is flat and AT&T is down 6%. While it’s not nearly as bad as the S&P 500’s nearly 7.5% loss, it’s still nothing to call (or write about) home.

“In a context of terrifying geopolitical risks and disturbing financials, it is not surprising that telecoms stocks have outperformed,” MoffettNathanson analysts wrote. “If there is any surprise, it is that they have not outperformed any more.”

They point out that major US wireless service providers have no exposure to Europe, where recession risks are highest and consumers feel uncomfortable with soaring oil and natural gas costs.

Wireless stocks should still do well even if the economy collapses

Telecom companies are also generally considered good defensive bets when the economy is slowing.

“If there is a recession in the US, their services are, on the whole, indispensable. Verizon and AT&T are both stable dividends,” analysts added. Both companies pay dividends with significantly higher yields than long-term Treasury bills.

“They are ideal, it would seem, for the times. What they lack, however, is pricing power,” analysts added.

T-Mobile’s stock held up better, gaining around 10% this year thanks in part to increased market share and low customer churn (i.e. subscribers changing their wireless provider).

“Only T-Mobile seems well positioned to weather this storm,” MoffettNathanson analysts said. “With plenty of growth opportunities still ahead … we believe T-Mobile’s stock earnings are poised to accelerate.”

As part of its deal with Sprint, T-Mobile said it won’t raise prices for existing customers for three years. But AT&T and Verizon seem to recognize they may need to raise prices.

On AT&T Analysts Day earlier this month, Chief Financial Officer Pascal Desroches predicted there will be a “more normalized industry background” and what he called “surgical” price hikes by the end of the year. The goal is “stable ARPU”, he added.

And Verizon chief financial officer Matt Ellis said during the company’s earnings call in late January that there is “good news” for the company on the expense front.

Many of the company’s costs are tied to long-term contracts, he said, which means Verizon “won’t necessarily see the full impact of inflation and at the same pace that other industries see.”

But Ellis did not dismiss the threat of further price pressure.

“Inflation is out there. And we will certainly see some of it,” he said. “It’s real. We’ll take steps to deal with it.”

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