Is AT&T Best of Breed?

With shares of AT&T (NYSE:T) trading at around $37.02, is T an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock’s Movement

Is AT&T what it used to be? That’s debatable. An opinion will be formed in the Conclusion section. What is fact is that AT&T has a 2.9 of 5 rating on Glassdoor.com. In other words, employees are somewhat content with the environment and culture. That said, two other scores on Glassdoor.com are a bit more worrisome when it comes to company culture. One, only 46 percent of employees would recommend the company to a friend. Two, only 46 percent of employees approve of CEO Randall Stephenson. This is important because disgruntled employees will often mean production potential isn’t being met. With that aside, let’s take a look at some positives and negatives for AT&T.

Positives:

  • 4.70 percent yield (higher than peers mentioned in this article)
  • Expects subscriber net additions for full year
  • Earnings improved year-over-year: $0.67 vs. $0.60
  • Wireless service margin improved to 43.2 percent from 42.3 percent year-over-year
  • Cut capital spending target for 2014 and 2015
  • Added 731,000 U-verse Internet subscribers in Q1 (record high)
  • Added 232,000 U-verse TV subscribers in Q1 (strongest growth rate in nine quarters)
  • Consistent revenue improvements on annual basis

Negatives:

  • Wireless business performing poorly due to weak demand
  • Loss of iPhone exclusivity
  • Net loss of cell phone subscribers for Q1
  • Losing market share to Verizon
  • Tablet consumers bring in less revenue than smartphone users
  • Slowing mobile phone consumer growth
  • Growth in average-monthly-revenue-per-user below expectations at 0.90 percent
  • Revenue decline in Q1 year-over-year: $31.36 billion vs. $31.82 billion
  • Missed revenue expectation of $31.74 billion in Q1

Now let’s take a look at some comparative numbers. The chart below compares fundamentals for AT&T, Verizon Communications Inc. (NYSE:VZ), and Sprint Nextel Corp. (NYSE:S). AT&T has a market cap of $203.41 billion, Verizon has a market cap of $148.46 billion, and Sprint has a market cap of $21.35 billion.

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T

VZ

S

Trailing   P/E

29.63

129.82

N/A

Forward   P/E

13.67

16.39

N/A

Profit   Margin

5.70%

0.98%

-12.24%

ROE

7.60%

13.07%

-46.73%

Operating   Cash Flow

$39.18 Billion

$33.06 Billion

 $3.00 Billion

Dividend   Yield

4.70%

3.90%

N/A

Short   Position

1.50%

2.00%

2.80%

 

Let’s take a look at some more important numbers prior to forming an opinion on this stock…

E = Equity to Debt Ratio Is Normal         

The debt-to-equity ratio for AT&T is close to the industry average of 0.80.

Debt-To-Equity

Cash

Long-Term Debt

T

0.75

$4.95 Billion

$69.84 Billion

VZ

0.60

$6.14 Million

$52.88 Billion

S

3.43

$8.20 Million

$24.34 Billion

 

T = Technicals Are Still Strong

AT&T has performed well over the past several years. However, Verizon has been the top performer in this group over a three-year time frame.

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1 Month

Year-To-Date

1 Year

3 Year

T

2.86%

12.60%

27.01%

66.64%

VZ

6.76%

22.36%

40.34%

122.80%

S

15.15%

24.69%

202.10%

63.66%

 

At $37.02, AT&T is trading above all its averages.

50-Day   SMA

36.73

100-Day   SMA

35.48

200-Day   SMA

35.84

 

E = Earnings Have Been Strong                             

Earnings have been inconsistent on an annual basis. Revenue has improved for several consecutive years, but the pace has slowed.

2008

2009

2010

2011

2012

Revenue   ($)in   billions

123.44

122.51

124.28

126.72

127.43

Diluted   EPS ($)

-0.44

2.05

3.35

0.66

1.25

 

When we look at the previous quarter on a year-over-year basis, we see a decline in revenue, but an improvement in earnings.

3/2012

6/2012

9/2012

12/2012

3/2013

Revenue   ($)in   billions

31.82

31.58

31.46

32.58

31.36

Diluted   EPS ($)

0.60

0.66

0.63

-0.64

0.67

 

Now let’s take a look at the next page for the Trends and Conclusion. Is this stock an OUTPERFORM, a WAIT AND SEE, or a STAY AWAY?

T = Trends Might Support the Industry

Consumers are becoming more interested in simpler plans with fewer features. Therefore, trends might not favor the industry for much longer.

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Conclusion

For those investors who are concerned about the status of the global economy, or a potential downturn in the stock market (they’re not as connected as they should be), Verizon held up better than AT&T in 2008. Verizon also has a better reputation among consumers as well as a stronger company culture. Verizon has simply become a better company through the years.

As far as AT&T goes, it’s certainly not a bad company, but it’s not what it used to be, either. There are many headwinds for AT&T, and it’s no longer best of breed. That said, the yield is still enticing.

AT&T is a WAIT AND SEE.

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Disclosure: All content posted represents my opinion and views and should never be considered professional advice. You should do your own research and consult with a professional financial advisor before making any investment decisions. I do not have a position in this stock. I am currently short technology, financials, the Russell 2000, and the euro.