Can AT&T See a Turnaround?

With shares of AT&T (NYSE:T) trading around $33, 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, providers like AT&T stand to see rising profits.

AT&T is in the middle of many things.  The telecoms operator is reported to be expanding and upgrading its network in an ambitious project to compete effectively in the industry. The company is also selling assets as part of its consolidation efforts to avoid unnecessary burden while raising funds for future investments. As far as future investments are concerned, the company is looking at the opportunity in connected vehicle segment, where it is already in talks with Tesla Motors Inc (NASDAQ:TSLA) and Audi. Moreover, the company is said to be considering merger with the leading UK carrier Vodafone Group (NASDAQ:VOD) in an effort to capture the lucrative Europe telecom industry. If these investments are successful, there will be reasons for investors to celebrate. However, at present the stock lacks reliable growth opportunities. This explains why the stock’s performance in the year so far, and even in the last year has not been anything to be proud about.

T = Technicals on the Stock Chart Are Weak

AT&T stock has been range-bound over the past couple of years. The stock is currently pulling back and may need time to stabilize before heading higher. 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 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

19.13%

63%

60%

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

Put IV Skew

Call IV Skew

February Options

Steep

Average

March Options

Steep

Average

As of today, there is an 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 significant 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 the conclusion.

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 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 Q3

2013 Q2

2013 Q1

2012 Q4

Earnings Growth (Y-O-Y)

N/A

7.58%

11.67%

-39.59%

Revenue Growth (Y-O-Y)

N/A

1.58%

-1.46%

0.23%

Earnings Reaction

-1.84%

-1.14%

-5.02%

0.80%

AT&T has seen increasing earnings and revenue figures over the last four quarters. From these numbers, the markets have had conflicting feelings about 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 (NYSE:S), T-Mobile (NASDAQ:TMUS), and sector?

AT&T

Verizon

Sprint

T-Mobile

Sector

Year-to-Date Return

-4.44%

-2.95%

-11.40%

-2.32%

-6.27%

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

Conclusion

AT&T is a communications and entertainment company that operates around the world. The company’s operator is reported to be expanding and upgrading its network in an ambitious project to compete effectively in the industry. The stock has been consolidating in recent years and is currently pulling back. Over the last four quarters, earnings and revenues have been increasing. However, investors have had conflicting feelings about recent earnings announcements. Relative to its peers and sector, AT&T has been a weak year-to-date performer. WAIT AND SEE what AT&T does next.

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