Monday, August 08, 2011

AT&T Looks Good on Bid To Grow Wireless

AT&T (NYSE: T) is a shadow of its former self. Until a judge broke it up in the mid-1980s, it controlled most telephone traffic. But after spin-offs and acquisitions, AT&T is on the prowl for growth. Should you buy it?

In 1982, Judge Harold Green negotiated an anti-trust settlement with AT&T resulting in a break-up of the company. That created a tidal wave of consulting work that kept me busy for years. I helped AT&T develop new systems to measure customer satisfaction and sales productivity and analyzed the profit potential of the long-distance telecommunications industry.

But that's ancient history. Since then, AT&T spun off its local telecom subsidiaries in 1984 and then reacquired some of them. For example, in 2005 it bought SBC Communications -- which included its former Southwestern Bell subsidiary -- after its 2000 deal to acquire MediaOne, a cable company. And in March 2011, it announced a deal to acquire T-Mobile for $39 billion in a bid to boost its fast-growing wireless business.

So should you buy AT&T stock or avoid it? Here are three reasons to consider buying:
  • Attractive dividend. AT&T has a 5.95% dividend yield -- a very strong reason to buy the stock.
  • Expectations-meeting-or-beating earnings reports. AT&T has beaten or met analysts’ expectations in all of the last five reporting periods. In its 2011 second quarter, AT&T reported $0.60 in adjusted EPS -- one cent above analysts' expectations. Its mobile broadband growth, strong smartphone sales and stable wireline revenues contributed to the better growth.
  • Out-earning its cost of capital. AT&T is earning more than its cost of capital – and it’s improving. How so? It produced positive EVA Momentum, which measures the change in “economic value added” (essentially, after-tax operating profit after deducting capital costs) divided by sales. In the first six months of 2011, AT&T's EVA momentum was 2%, based on first six months' 2010 annualized revenue of $122.7 billion, and EVA that rose from negative $331 million annualizing the first six months of 2010 to $1.5 billion annualizing the first six months of 2011, using a 6% weighted average cost of capital.
Two reasons to avoid this stock
  • Rapidly rising sales and profits but a weaker balance sheet. AT&T has been growing with declining margins. Its $124.3 billion in revenues have grown at an average rate of 18.5% over the last five years while its net income of $19.1 billion has tumbled at a 26.8% annual rate over that period -- yielding a high 15% net profit margin. Its debt has grown while its cash has tumbled. Specifically its debt has grown at a 4.2% annual rate from $50 billion (2006) to $59 billion (2010) while its cash has fallen at a 12.6% annual rate from $2.4 billion (2006) to $1.4 billion (2010).
  • Slightly elevated valuation. AT&T's price to earnings to growth of 1.10 (where a PEG of 1.23 is considered fairly priced) means it is a bit over-valued. It currently has a P/E of 8.7 and is expected to grow 7.1% to $2.54 in 2012.
AT&T is a very strong company and the current market turmoil should present investors with a chance to buy the stock at a lower price.


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