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AT&T, Inc. (T) reported its third quarter earnings on October 23, 2013. The company failed to meet analyst expectations and reported an EPS of $0.67, with an earnings surprise of -1.50%. However, I reiterate my bullish stance on the company, as it managed to deliver stable revenue growth, along with strong results in wireless and U-verse segments. Moreover, the company continues to maintain its free cash flow strength to sustain its healthy dividend payout.

Financial Performance of 3Q '13

The company reported consolidated revenues of $32.2 billion, with a YoY growth of 2.2%. Wireless revenue was up by 5.1% YoY due to double digit revenue growth in data and equipment segments. T also reported wireless postpaid net additions of 363,000, almost double the figure reported in the same quarter last year. This attractive number is driven by the activation of 388,000 tablet devices in the quarter. Postpaid churn rate was somewhat flat at 1.07% in 3Q'13, as compared to 1.08% in 3Q'12. Average revenue per unit (ARPU) was up by 1.5%, which was slightly diluted by tablet sales, as the phone only ARPU was greater than 3%. With the launch of some major smartphones and favorable upgrade programs, T has managed to increase its smartphone sales to 6.7 million, with a YoY rise of 9.8%.

U-verse revenues were up by 29.1%, with 265,000 video additions and 655,000 broadband additions. Despite the strong performance, U-verse wireline revenue experienced a YoY decline of 1%. One of the other negative takeaways was the decline in phone net additions, primarily because of serious competition from T-Mobile (TMUS). Furthermore, the YoY wireless service revenue growth of 3.7% was weaker than what was being expected by analysts.

The company's LTE framework has expanded to 250 million POPs in more than 435 markets, and it is expected to reach to 270 million POPs by the end of this year. Also, it is expected to complete its 4G footprint by the summer of 2014. So the company will be able to manage data intensive applications in an effective manner.

Mergers and Acquisitions

The U.S. telecommunication industry is going through consolidation, and Verizon Communications (VZ), one of T's main competitors, recently nearly doubled its share in the U.S. wireless market. So T is looking to expand its operations in Europe because of three reasons. Firstly, growth in the U.S. wireless market is slowing down, which was a major growth driver for the second largest telecom company. Secondly, where telecom companies had to face very strict regulatory policies in Europe in the past, these policies have gradually become lax and it is now more favorable for a telecom company to operate in the continent. Lastly, 4G-LTE technology is relatively new in Europe. So, the company is planning to leverage its expertise in laying down its 4G-LTE network, which could help drive growth. T is looking at several possible acquisitions, but Vodafone (VOD) remains the primary target because it has become more affordable after it sold of its investment in Verizon Wireless. Furthermore, VOD offers complete access to European markets, as it has its footprint in all the primary markets in the continent. Randall Stephenson, the chief executive officer of the company, is reported to have said about the potential European acquisition in an investor's conference, "If there were opportunities that presented a good value, of course we would do it."

The company has managed to sell its wireless towers for $4.75 billion to Crown Castle International. With this deal, Crown Castle has bought 600 towers from T, along with the exclusive right to operate or lease another 9,100 towers for an average life of 28 years. What this has done for T is that it has allowed the company to redirect its resources to the growth-oriented part of its business instead of being tied up in fixed assets. The precious cash could be used to improve its network, buy back shares, and in mergers and acquisitions.

The acquisition of Leap Wireless (LEAP) is still pending, as regulatory authorities have not given their approval for the transaction. Also, LEAP's shareholders will vote for their acceptance or rejection of T's offer on October 24, 2013. This acquisition will help the company increase its prepaid subscriber's base, and the company spectrum will reach 120MHz, the second largest in the industry.

Dividends and Share Buyback

The company has a long history of growing dividends, and it is currently yielding 5.10%. This is one of the primary reasons why the stock is popular among income-seeking investors and retirement accounts. T has paid dividends of $2.4 billion and it generates around $3.2 billion in the form of free cash flows. So, it means that the company's dividends are safe, and they could continue to grow in the future. The company is also pursuing an aggressive share buyback program, as it has repurchased $11.1 billion worth of shares YTD, which shows that the company believes that its shares are undervalued.

Risks

The competition is heating up as SoftBank's (SFTBF) investment in Sprint (S) and the acquisition of MetroPCS by TMUS has enabled these smaller players to compete more aggressively. Regulatory risk continues to be an important factor, as it can change the industry dynamics. Lastly, growth in the telecom sector is dependent on an economic recovery.

Conclusion

The company is currently trading at a cheaper forward P/E of 13.21x, which is lower than its competitors, as VZ and TMUS are trading at forward P/Es of 14.44x and 32.34x, respectively. The company has managed to deliver strong third quarter results with solid growth in the wireless segment and U-verse. With an attractive dividend yield and international growth opportunities, T paints an encouraging outlook for the future.

Source: Bright Future Awaits AT&T As Company Builds On International Growth Opportunity