Can AT&T Benefit from a Potential Acquisition?

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, giant providers like AT&T stand to see rising profits.

AT&T is reportedly interested in buying whatever assets remain of Vodafone (NASDAQ:VOD) after the British wireless carrier sells its 45 percent stake in Verizon Wireless to Verizon Communications (NYSE:VZ), Bloomberg reports. AT&T has been interested in buying assets in Europe for some time. People familiar with the matter who spoke to Bloomberg said that AT&T is only interested in buying wireless assets and would not pursue the deal if Vodafone chooses to expand into cable or fixed-line businesses.

T = Technicals on the Stock Chart Are Weak

AT&T stock has struggled for most of the last couple years. The stock is currently trading near a lower support level established just last year. 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 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

21.27%

96%

95%

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

Put IV Skew

Call IV Skew

September Options

Steep

Average

October 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 very 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 Mixed 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 Q2

2013 Q1

2012 Q4

2012 Q3

Earnings Growth (Y-O-Y)

7.58%

11.67%

-39.59%

3.28%

Revenue Growth (Y-O-Y)

1.58%

-1.46%

0.23%

-0.06%

Earnings Reaction

-1.14%

-5.02%

0.80%

-0.82%

AT&T has seen rising earnings and mixed revenue figures over the last four quarters. From these numbers, the markets have not been satisfied with 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

0.03%

9.63%

17.81%

17.28%

10.24%

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 is reportedly interested in acquiring the remaining portion of Vodafone if the Verizon deal goes through. The stock has struggled in recent years and is now trading near lows not seen since last year. Over the last four quarters, investors in the company have not been satisfied with recent earnings announcements as earnings have been rising while revenues have been mixed. 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.

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.