Will A Merge with Vodafone Send AT&T Higher?

With shares of AT&T (NYSE:T) trading around $36, 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 reportedly preparing to get serious about buying what’s left of Vodafone (NASDAQ:VOD) after the British wireless carrier sells its 45 percent stake in Verizon Wireless to Verizon Communications (NYSE:VZ). People familiar with the matter told Bloomberg that AT&T is working to determine which of Vodafone’s many global assets it wants to keep and which would be spun off. A merger between AT&T and Vodafone would create the world’s largest telecom operator by sales, Bloomberg said. AT&T has been looking to expand into Europe, which has less advanced network technology in place than in the U.S.

T = Technicals on the Stock Chart are Mixed

AT&T stock has been range-bound over the past couple of years. The stock is currently trading sideways and looks set to continue. 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 above its rising key averages which signal neutral to bullish 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

17.22%

20%

18%

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

Put IV Skew

Call IV Skew

November Options

Flat

Average

December Options

Flat

Average

As of today, there is an average demand from call buyers or sellers and low demand by put buyers or high demand by put sellers, all neutral to bullish 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 bullish 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 been pleased 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 US (NASDAQ:TMUS), and sector?

AT&T

Verizon

Sprint

T-Mobile US

Sector

Year-to-Date Return

-1.60%

-2.19%

23.15%

58.62%

20.49%

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 preparing to get serious about merging with Vodafone, which would create the world’s largest telecom operator by sales. The stock has been consolidating in recent years and is now trading sideways. Over the last four quarters, earnings and revenues have been increasing, which has left investors pleased with the company. Relative to its peers and sector, AT&T has been a weak year-to-date performer. WAIT AND SEE what AT&T does next.

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.