First-Quarter 2013 Results
Tuesday, April 23, AT&T (NYSE:T) reported 2013 first-quarter results announcing Operating Revenue of $ 31.36 billion, down 1.5 % compared with the same quarter 2012 with $31.822 billion and up 0.9% when excluding revenues from Advertising Solution Business unit.
The net earning figure for the first quarter was $3,773 billion, up 3.3% compared with the same quarter 2012 with $3.652 billion.
Consequently, diluted earning per share for the first quarter was $0.67, up 11.7% compared with $0.60 diluted EPS of the first quarter 2012.
As shown in the tab. below, the diluted EPS of the first quarter 2013 , was higher than the average estimate ( $0.64) with a positive surprise of 4.7%. But in my opinion, the real expectation is higher than the average estimation declared.
Here below are reported EPS Estimate versus EPS Actual and the surprise of past quarters. It is relevant to note that the surprise is positive for each quarter (underestimation), except for the last quarter of 2012 .
During the quarter, the AT&T's board of directors approved a third 300 million share repurchase authorization.
At the end of the quarter, about 61 million shares remained on the second authorization, which is expected to be completed in the second quarter.
AT&T, Inc. was founded in 1983 and it is based in Dallas, Texas.
The company was previously known as SBC Communications Inc. and changed its name to AT&T Inc. in November 2005. The company provides telecommunications services to consumers, businesses, and other providers in the United States and internationally. The company operates in three segments: Wireless, Wire line, and Services.
The Fundamental Analysis has been developed to calculate the Fair Value of the company.
With regard to performing fundamental analysis, the profits and loss accounts and the balance sheets over the latest three years have been considered.
From 2010 to 2012 the turnover increased by 2.54% while the Gross Operating Margin dropped from 38,952 to 31,140 million USD with a variation of EBITDA Margin equal to -6.91 points.
The Operating Profit decreased by 33.60% to 12,997 million USD and net income decreased 63.43%.
The profitability indicators show a decrease in ROI of 2.81 points to 8.11% and a decrease in ROE of 9.89 points to 8.13%.
From the balance sheet's point of view there was an increase in the Debt-to-Equity Ratio, which went from 0.60 to 0.73, the result of a net equity of 92,695 million USD, and a net debt of 67,532 million USD.
Based on 10 years' of prospective budgets as well as those from the previous three years, the Fair Value has been calculated using the Discounted Cash Flow method and the result has been verified using the Economic Value Added approach.
The prospective balance sheets were drawn up based on the following assumptions:
- Turnover growth 2%
- EBITDA margin up slightly from 31.00% to 32.00%
- increasing ROI from 10.28% to 10.91%
- Cost of debt steady 4.50%
- Tax rate at 28.00%
Fundamental analysis, as described, calculates a Fair Value of $39.75 per share, which, when compared with the current price of around $ 39 (close 04/23) , indicates that AT & T is near to reaching its growth potential; in other words, the stock is correctly evaluated by the market. We can estimate how the value of the security would change if our assumptions were optimistic. We focus on two of the most important financial parameters: the sales and EBITA Margin. We assumed a sales growth of 2% and an EBITDA margin from 31% to 32%; now we want to calculate how the Fair Value would change if growth sales decreased or increased by 05% or 1%, and the EBITDA margin decreased or increased by 1% or 2%, compared to the values assumed for each year.
Based on the calculation, the best-case scenario indicates a rise in the Fair Value to $48.82, but at worst it would drop to $31.75, lower than the current price.
To be more secure, we can compare the fair value previously calculated, with the target price provided by 24 analysts. As we can see in the table below the target ranges from a maximum of $44 to a minimum of $31 with a most likely value of about $37.50.
Such figures confirm that the fair value is calculated with the fundamental analysis above, meets the consensus of analysts. We shall now calculate the degree of risk.
A number of risk factors have been checked and, among the main ones, the ability of the price to react to market changes as well as price volatility, have been considered. The results are reassuring as AT&T has a beta = 0.38 and its monthly volatility is around 9% on average over five years. To assess the degree of risk we must also consider the indebtedness, in particular, the gearing ratio, which is approximately 72%. Considering the factors indicated, the analysis of the risk of AT&T is synthesized in the indicator BR # risk = 33.32 (range 0 to 100), which shows a low risk.
AT&T has increased its dividend for 29 consecutive years. In recent years, the dividend has increased from $ 1.47 per share in 2007 to $ 1.77 in 2012, with an increase of 20%. Therefore investors during these years cashed considerable dividends, which currently is about 4.60%. But let me make some considerations about the sustainability of these dividends. The EPS, from year 2007 to 2012, dropped by 36% with a minimum in 2011. However, AT&T wanted to maintain high dividends, which in the same period were increased by 20%. This choice has resulted in very high payouts and the dividends exceeded the EPS, in both year 2011 and in 2012. In fact, in 2011 the payout ratio was 262.12%, while in 2012 the payout ratio was 141.6%.
So in summary the EPS downward and dividends growing, this situation would become unaffordable if prolonged. Also consider that currently inflation is low, so even interest rates can be kept low. The low interest rates make dividends of AT&T very attractive because they are much higher compared with the government bonds. However, the risk of a rise in inflation in the future may require an increase in interest rates and therefore in the yields of government bonds. These last may approach or exceed the dividend yield of AT&T. If this happens, investors' attention will decrease and AT&T would have to review the dividend policy. For all the above considerations, AT&T would have many difficulties to maintain past dividend levels and therefore may suffer.
To get a picture of the trend of long, medium and short term, we take a look at AT&T technical analysis evaluating the evolution of prices and volumes in different time frames.
The trend is positive for both the short term and the medium and long term. After a minimum tested on January 22, the price began to rise, coming out of the previous trading range. On April 11, it touched the previous highs, tested in 2012, and has pulled back. The strong breakout of this level, technically speaking, will determine the continuation of the short-term trend.
AT&T is king stock, it is correctly estimated by the market, it is giving very high dividends and it has quite low risk. The prices are in uptrend.
However, we must pay attention because the price is very close to the Fair Value, which could rise substantially only in the event of a significant improvement of fundamental data; unless a speculative bubble starts. It is also good to remember that in the future AT&T could find it more difficult to maintain the current excellent dividend yield.
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.
Additional disclosure: The opinions in this article are for informational purposes only and should not be construed as a recommendation to buy or sell the stocks mentioned. Please do your own due diligence before making any investment decision.