AT&T: A $34 Stock Worth $45

| About: AT&T Inc. (T)

AT&T (NYSE:T) is one of 30 blue-chip stocks included in the Dow Jones Industrial average. The company pays a solid dividend of $1.80 per share and controls slightly more than 30% of the world's wireless subscribers.

AT&T's Wireless segment includes both products and services supporting wireless services and is its largest revenue producer. The Wireline segment includes most other telecommunications services including U-verse, web hosting, international and toll free.

AT&T has about 5.8 billion shares outstanding and a market capitalization around $190.5 billion. A comparison of standard ratios for AT&T, Verizon (NYSE:VZ), its largest wireless competitor, the Telecommunications Industry, and the Technology sector as a whole are shown below:

  1. Price/Earnings is currently around 44 compared with 39, 15 and 19, for Verizon, the industry and sector respectively.
  2. Return on Equity is around 4% compared with 14%, for Verizon, the industry and sector.
  3. Dividend Yield is around 5% compared with 5%, 5% and 3%, for Verizon, the industry and sector respectively.
  4. Price to book is around 2 compared with 3, -4 and 5, for Verizon, the industry and sector respectively.
  5. Net Profit Margin is around 12 compared with 5, 10 and 11, for Verizon, the industry and sector respectively.
  6. Price to free cash flow is 46 compared with 252, 180 and 32, for Verizon, the industry and sector respectively.

Specific Issues

AT&T is dealing with a number of issues at the moment. The supply of the iPhone 5 continues to hamper AT&T's sales and upgrades for wireless customers. This is an issue for other cellular carriers as well. However, Apple Insider reports that the supply continues to improve and expects "consistent availability" for AT&T within the next several weeks. Several weeks ago AT&T's mobility chief Ralph de la Vega stated that AT&T has sold twice as many iPhone 5's as Verizon or around 1.3 million units. de la Vega goes on to state that nearly 4.7 million iPhones were sold in the third quarter, which indicates that plenty of customers are opting to stick with the older technology rather than upgrade.

Another important note according to a report from the Consumer Intelligence Research Partners is that when AT&T customers are purchasing a new iPhone, 94% of them choose to stay with AT&T, while 65% of T-Mobile customers choose to switch to AT&T. [Sprint (S) and Verizon have similar retention rates to AT&T.] This bodes well for AT&T's future growth.

AT&T, as well as other carriers, is also dealing with a large decline in landline voice service. In its third quarter 10Q, AT&T claims that its "total switched access lines decreased" almost 13% since September 2011, as customers trade their landlines for cellphones. AT&T remains optimistic that these customers will choose AT&T for their cell or VoIP service. Wireless service did increase 4.5% during the same time frame.

AT&T is right to be concerned about the recent investment from Japanese firm Softbank to Sprint (NYSE:S). Softbank will invest a total of about $20 billion via various channels. In addition, Sprint announced plans to acquire spectrum and customers from US Cellular expecting to gain around half a million new customers in the Midwest.

In addition, AT&T will be taking a large hit from the aftermath of Hurricane Sandy. A large percentage of telephone service was disrupted in the tri-state area with many Manhattan residents resorting to "old" technology. The 12,000 pay phones remaining in NYC had long lines of people waiting to connect with their loved ones. Although the firm's Cost of Services declined 0.6% for the first nine months of this year, it is safe to say that those savings will be lost by the end of this fiscal year while AT&T repairs its wireless and wireline networks. As of November 7, AT&T had restored 98% of its wireless network.

Looking forward, AT&T announced last week that it will be investing "$14 billion over the next three years to significantly expand and enhance its wireless and wireline IP broadband networks to support growing customer demand for high-speed Internet access and new mobile, app and cloud services." The company is calling this investment "Project Velocity IP" or VIP. As a part of this project, AT&T will continue to upgrade its network, purchase additional bandwidth spectrum from the FCC, expand its offering of U-verse to about 8.5 million additional customers and expand its fiber optic network to reach an additional one million business locations. This $14 billion expense is likely to see huge benefits in an increased customer base and increased loyalty from existing customers. (T-Mobile is also upgrading its LTE network, hoping to cover 200 million customers by the end of 2013. However, it will need to work on retaining those customers as noted above.)

Given the massive upgrade to AT&T's network, several other companies should be reviewed as potential beneficiaries of these investment dollars. In his report over the weekend, Bret Jensen of Seeking Alpha recommends two different stocks. American Tower (NYSE:AMT) is one firm mentioned as owners of cell towers will probably benefit. The other area is application delivery technology. He recommends F5 Networks (NASDAQ:FFIV) specifically.

Bottom Line

From the view of a simple future cash flow calculation, and, considering AT&T's increased dividend of $1.80 per share annually, the stock should be valued around $45.

Looking at analysts' expected 2013 earnings of $2.57 and a more reasonable PE of 18, the stock should be valued around $46.

Given the issues AT&T is currently facing and its plans for the future, I consider this a strong stock. This is a good company to hold for the long term and one to purchase on dips below $35.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.