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Here is a look at how AT&T (T) fares in ModernGraham's opinion, based on an updated and modernized version of Benjamin Graham's requirements of defensive and enterprising investors from The Intelligent Investor:

Defensive and Enterprising Investor Tests (explanation): Defensive Investor - must pass at least 6 of the following 7 tests: Score = 5/7

  1. Adequate Size of Enterprise - market capitalization of at least $2 billion - PASS
  2. Sufficiently Strong Financial Condition - current ratio greater than 2 - FAIL
  3. Earnings Stability - positive earnings per share for at least 10 straight years - PASS
  4. Dividend Record - has paid a dividend for at least 10 straight years - PASS
  5. Earnings Growth - earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period - FAIL
  6. Moderate PEmg ratio - PEmg is less than 20 - PASS
  7. Moderate Price to Assets - PB ratio is less than 2.5 or PB x PEmg is less than 50 - PASS

Enterprising Investor - must pass at least 4 of the following 5 tests: Score = 3/5

  1. Sufficiently Strong Financial Condition, Part 1 - current ratio greater than 1.5 - FAIL
  2. Sufficiently Strong Financial Condition, Part 2 - Debt to Net Current Assets ratio less than 1.1 - PASS
  3. Earnings Stability - positive earnings per share for at least 5 years - PASS
  4. Dividend Record - currently pays a dividend - PASS
  5. Earnings growth - EPSmg greater than 5 years ago - FAIL

Valuation Summary (explanation):

MG Value$12
MG OpinionOvervalued
Value Based on 3% Growth$27
Value Based on 0% Growth$16
Market Implied Growth Rate5.21%
Net Current Asset Value (NCAV)-$1.83
PEmg18.91
Current Ratio0.69
PB Ratio2.20

Key Data:

Balance Sheet - 6/30/2013

Current Assets$21,428,000,000
Current Liabilities$31,189,000,000
Total Debt$71,917,000,000
Total Assets$272,093,000,000
Intangible Assets$129,468,000,000
Total Liabilities$186,113,000,000
Outstanding Shares5,335,230,000

Earnings Per Share - Diluted

2013 (estimate)$2.51
2012$1.25
2011$0.66
2010$3.22
2009$2.17
2008$2.16
2007$1.94
2006$1.89
2005$1.42
2004$1.50
2003$1.76
2002$2.2

Earnings Per Share - Modern Graham

2013 (estimate)$1.88
2012$1.67
2011$1.93
2010$2.47
2009$2.03
2008$1.90

Conclusion

AT&T does not pass the requirements for either the Defensive Investor or the Enterprising Investor following ModernGraham's interpretation of Benjamin Graham's Intelligent Investor teachings. In addition, the company appears to be overvalued due to a lack of earnings growth over the last ten years.

What do you think? Can AT&T turn around and grow its earnings to justify the current price?

Source: ModernGraham Valuation Of AT&T