Is AT&T Confused - Or Just Smarter than Everyone Else?

Includes: CMCSA, T, TWX, VZ
by: Trefis

Although AT&T (NYSE:T) and Verizon (NYSE:VZ) dominate the market for US mobile phone service, AT&T’s network is perceived to be inferior to that of Verizon due to less mobile phone coverage across the US and poorer call quality compared to Verizon.

AT&T Trails in Mobile Phone Capital Expenditures

A primary reason why AT&T lags behind Verizon is that it spends less money on the wireless equipment needed to compete with Verizon on coverage and quality. We estimate that AT&T’s annual mobile phone capital expenditure was about $60 per subscriber in 2009, less than the $78 per subscriber spent by Verizon. AT&T would need to spend an additional $1.5 billion annually to match Verizon’s investment per subscriber.

We expect Verizon’s mobile phone capital expenditures to reach nearly 18% of its mobile phone gross profits in 2010 and increase to over 20% over the Trefis forecast period. In comparison, the same figure for AT&T is expected be about 15% in 2010 and to increase to 17% by the end of the Trefis forecast period.

Focusing Capital Expenditure Where It Matters

We estimate AT&T’s total annual capital expenditure to be $18 billion in 2009, which is more than the $17 billion spent by Verizon; however, AT&T spends about 74% of the $18 billion on three business divisions:

  1. Internet & TV
  2. Phone Landlines
  3. AT&T Business

Interestingly, we estimate that these three businesses together account for only 40% of AT&T’s value. We estimate that AT&T spent only 26% of its total capital expenditures on its mobile phone business which accounts for a little more than half of AT&T’s value.

AT&T sees a strong growth opportunity in the TV and internet markets which are dominated by cable companies like Comcast (NASDAQ:CMCSA) and Time Warner (TWC). By strengthening its internet, TV and phone offerings, AT&T will be better positioned to offer service bundles that compete with those offered by the cable companies.

Our analysis of the value of AT&T’s internet and TV business factors in growth of TV subscribers, from 2 million in 2009 to 7 million by the end of our forecast period, as well as growth in non-DSL (e.g. u-Verse) internet subscribers from less than 2 million in 2009 to nearly 6 million by the end of our forecast period.

Compared to the $5 billion we estimate that AT&T spent on mobile phone capital expenditures in 2009, Verizon spent about $7 billion, or 42% of its total capital expenditures, on mobile phone capital expenditures. We believe that AT&T will need to increase its mobile phone capital expenditures to match Verizon’s extensive coverage and retain market share.

You can modify our forecasts for AT&T’s CapEx as a % of Gross Profits and AT&T’s Mobile Phone Market Share to see how increases in both capital expenditures and market share would impact AT&T’s stock.

Disclosure: No positions