Is AT&T Stock Undervalued?

With shares of AT&T (NYSE:T) trading around $35, 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:

T = Trends for a Stock’s Movement

AT&T is a provider of telecommunications services in the United States and worldwide. Services offered include wireless communications, local exchange services, and long-distance services. AT&T operates in four segments: Wireless, Wireline, Advertising Solutions, and Other. The communications products offered through AT&T’s segments reach audiences using just about every widely adopted medium: Internet, voice, television, and mobile. As consumers continue to adopt this technology, giant providers like AT&T stand to see rising profits.

It is being reported that AT&T is still looking to acquire a stake in the television streaming service Hulu, in order to expand its content. The company also reported earnings on Tuesday afternoon. The wireless carrier failed to meet analyst expectations, something the company blamed on the need to offer smartphone discounts in order to lock customers into long-term contracts. Earnings missed analyst expectations, while revenues and contract customers both rose. Look for AT&T to continue its dominance, as consumers and companies continue to search for entertainment and communication services at increasing rates.

T = Technicals on the Stock Chart are Mixed

AT&T stock has been struggling over the last several months. The stock is now trading slightly lower, as investors are not too impressed with the company’s recent news. Analyzing the price trend and its strength can be done using key simple moving averages.

What are the key moving averages? They are the 50-day (pink), 100-day (blue), and 200-day (yellow) simple moving averages. As seen in the daily price chart below, AT&T is trading slightly below its key averages, which signal neutral to bearish price action in the near-term.

T

(Source: Thinkorswim)

Taking a look at the implied volatility (red) and implied volatility skew levels of AT&T options may help determine if investors are bullish, neutral, or bearish.

Implied Volatility (IV)

30-Day IV Percentile

90-Day IV Percentile

AT&T Options

16.79%

3%

0%

What does this mean? This means that investors or traders are buying a very minimal amount of call and put options contracts, compared to the last 30 and 90 trading days.

Put IV Skew

Call IV Skew

August Options

Steep

Average

September Options

Steep

Average

As of today, there is average demand from call buyers or sellers, and high demand by put buyers or low demand by put sellers, all neutral to bearish over the next two months. To summarize, investors are buying a very minimal amount of call and put option contracts, and are leaning neutral to bearish over the next two months.

On the next page, let’s take a look at the earnings and revenue growth rates, and what that means for AT&T’s stock.

E = Earnings Are Improving Quarter-Over-Quarter

Rising stock prices are often strongly correlated with rising earnings and revenue growth rates. Also, the last four quarterly earnings announcement reactions can help gauge investor sentiment on AT&T’s stock. What do the last four quarterly earnings and revenue growth (Y-O-Y) figures for AT&T look like, and more importantly, how did the markets like these numbers?

2013 Q2

2013 Q1

2012 Q4

2012 Q3

Earnings Growth (Y-O-Y)

1.52%

11.67%

-39.59%

3.28%

Revenue Growth (Y-O-Y)

1.58%

-1.46%

0.23%

-0.06%

Earnings Reaction

-1.50%*

-5.02%

0.80%

-0.82%

AT&T has seen improving earnings and mixed revenue figures over the last four quarters. From these numbers, the markets have not been pleased with AT&T’s recent earnings announcements.

* As of this writing

P = Weak Relative Performance Versus Peers and Sector

How has AT&T stock done relative to its peers, Verizon (NYSE:VZ), Sprint Nextel (NYSE:S), T-Mobile (NYSE:TMUS), and sector?

AT&T

Verizon

Sprint Nextel

T-Mobile

Sector

Year-to-Date Return

4.39%

16.27%

3.44%

22.13%

10.46%

AT&T has been a poor relative performer, year-to-date.

Conclusion

AT&T is a communications and entertainment bellwether. The company is looking to expand its reach through a potential acquisition, but a recent negative earnings report has investors disappointed. The stock has not done very well in the last year, but seems to be stabilizing near current prices. Over the last four quarters, investors in the company have not been pleased — earnings have improved, while revenue figures have been mixed. Relative to its peers and sector, AT&T has been a poor year-to-date performer. WAIT AND SEE what AT&T does this coming quarter.

Using a solid investing framework such as this can help improve your stock-picking skills. Don’t waste another minute — click here and get our CHEAT SHEET stock picks now.