AT&T's 4G LTE Growth Justifies Current Price Multiples

| About: AT&T Inc. (T)

AT&T (NYSE:T) recently announced it had turned on its 4G LTE network in Bethlehem and Allentown, Pennsylvania, bringing customers the latest generation of wireless technology. Wireless spectrum is a finite resource, and LTE uses spectrum more efficiently than other technologies. LTE networks enable telecoms companies to trade at price multiples that are reasonable for investors. In this article, I will show that the growth stories surrounding AT&T justify its current price multiples.

AT&T announced consolidated revenues totaling $31.8 billion in the first quarter ended March 31st, 2012, up $575 million versus the year earlier quarter. Compared with results for the first quarter 2011, operating expenses were $25.7 billion versus $25.4 billion, and operating income was $6.1 billion, up from $5.8 billion. Led by mobile data growth in the first quarter of 2012, AT&T's total wireless revenues were up by 5.4% year-over-year to $16.1 billion. Wireless service revenues increased $4.3% to $14.6 billion in the first quarter. Wireless data revenues increased by more than $1.0 billion from the year earlier quarter to $6.1 billion.

How did AT&T's LTE network increase wireless revenues? The technology offers lower latency, or the processing time it takes to move data through a network, such as the time it takes to start downloading a web page or file once you have sent a request. It also creates more space to carry data traffic and services and delivers a better wireless experience.

Due to its advantage, AT&T announced in March that new markets would get the fast 4G LTE network for better wireless experience.

AT&T announced second quarter consolidated revenues of $31.6 billion, up 0.3% versus the year earlier period, up 20% when adjusted for advertising solution sales. It also recorded the highest-ever wireless margins, operating income margins of 30.3, with EBITDA service margin of 45.0%. Total wireless revenues, which included equipment sales, were up 4.8 percent year-over-year to $16.4 billion. Wireless service revenues increased 4.3 percent to $14.8 billion in the second quarter. Wireless data revenues - driven by Internet access, access to applications, messaging and related services - increased by $1.0 billion, or 18.8 percent, from the year-earlier quarter to $6.4 billion.

"Our mobile internet leadership continues, with solid gains in smartphone and tablets, plus our wireless margins have never been better," said Randall Stephenson, AT&T's CEO. "Smartphone and branded computing device sales continue to set a record pace, mobile data revenues up early 20%, and we have this growth with expanding margins. These results add confidence in our outlook for the year."

In July, AT&T announced that seven new cities would get an upgrade from "faux 4G" to the real 4G LTE network so customers could get improved wireless capabilities.

In the third quarter, AT&T wireless revenues were up 6.6% year-over-year to $16.6 billion. Wireless service revenues increased 4.5% to $14.9 billion. Wireless data revenues increased by more than $1.0 billion from the year earlier quarter to $6.6 billion.

"In wireless, we had another excellent smartphone quarter, and our LTE network build is ahead and on schedule," Stephenson said.

The new LTE roll-out in Bethlehem and Allentown will enable customers to reach mobile internet speeds up to ten times faster than 3G. People can stream, download and upload faster than ever before. Relating the new 4G LTE roll-out against AT&T's financial statements this year, it is clear that with the initiative, AT&T's wireless sector has been consistently improved in comparison to the previous year. And in addition, total revenues have not fallen, so it can be said that the company's cash generation continues to be strong.

Let's check how AT&T is performing with the rest of the companies. With gross margin of 0.55, compared with 0.41 for Sprint Nextel (NYSE:S), 0.60 for Verizon (NYSE:VZ), 0.53 for Windstream (NASDAQ:WIN), and 0.55 for the industry average, price-to-sales of 1.55, compared with 0.48 for Sprint, 1.10 for Verizon, 1.32 for CenturyLink (NYSE:CTL), AT&T can be said to be competitive. But it must be noted that the company reported a net income of $4.44 billion, compared with $-4.31 billion for Sprint and $3.08 billion for Verizon. Looking at the successive deployment of the 4G LTE network and the clearly improving margins, we can safely say that AT&T is a good buy at the moment and a good investment in the foreseeable future.

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.

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