Will Buying Hulu Boost AT&T?

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 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.

AT&T has reportedly teamed up with Chernin Group to make an offer for TV streaming service Hulu, which is currently owned by Comcast (NASDAQ:CMCSA), 21st Century Fox (NYSE:FOXA), and Disney (NYSE:DIS). Hulu may be up for sale because owners Fox and Disney have not been able to agree on the company’s direction. Look for AT&T to continue its dominance with the help of this potential acquisition, 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 made the most progress over the last year or so. The stock is now trading lower, after a negative reaction to the company’s most recent earnings report. Analyzing the price trend and its strength can be done using key simple moving averages. What are the key moving averages? 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 rising 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

18.94%

16%

14%

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

Put IV Skew

Call IV Skew

July Options

Steep

Average

August 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 small 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 Increasing 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 Q1

2012 Q4

2012 Q3

2012 Q2

Earnings Growth (Y-O-Y)

11.67%

-39.59%

3.28%

10.00%

Revenue Growth (Y-O-Y)

-1.46%

0.23%

-0.06%

0.25%

Earnings Reaction

-5.02%

0.80%

-0.82%

-2.11%

AT&T has seen increasing earnings and revenue figures over most of the last four quarters. From these numbers, the markets have expected more from AT&T’s recent earnings announcements.

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

5.52%

17.96%

24.43%

18.21%

14.34%

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

Conclusion

AT&T is a communications and entertainment giant that is looking to expand its reach through a potential acquisition of Hulu. The stock has posted a modest return this year, but looks to be struggling. Over the last four quarters, investors in the company have expected more, although earnings and revenue figures have mostly risen. Relative to its peers and sector, AT&T has been a weak year-to-date performer. WAIT AND SEE what AT&T does this coming quarter.

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