Why AT&T Still Has Potential

| About: AT&T Inc. (T)

Back in February of this year I wrote an article entitled "AT&T vs. Verizon, Which is the Better Value?'" The article weighed the pros and cons of owning one of the giant mobile companies, with my ultimate consensus being that AT&T (NYSE:T) was the better all-around play. Being that there are only a few weeks left in the calendar year, I will be the first to admit that contrary to my article, Verizon (NYSE:VZ) actually would have been the better all-around play for 2013. Verizon stock YTD is up roughly 14%, while AT&T stock has been a major lager this year, up only 1.98% on the year. Ironically, the best performing mobile company this year has actually been Sprint (NYSE:S), up a whopping 43% on the year.

That all being said, I still believe that AT&T is good for the long term and is the best all-around value play in the mobile space long term. Below I have listed out my reasons for this and how I think it will play into the performance of the stock and company in the year to come.

Why AT&T Still has Value

AT&T's biggest competitor in the national wireless arena is Verizon. This past year Verizon has made some very strategic plays to secure its longer term growth prospects. The company already had very strong top and bottom line growth, but with this year's agreement with Vodafone (VDO). Verizon will now take 100% ownership of its wireless business, resulting in it now controlling roughly 95% of all free cash flow the company generates. Just this year alone Verizon has been able to increase its cash flows by almost 24%. This increase in growth and cash flow has helped fuel the stocks run up this year and further solidified the soundness of the firm's dividend.

Although, AT&T may not have had any major announcements that would dramatically expand its business segment to the degree that Verizon did. Where AT&T shines is in its ability to deliver higher quality services to its customer base. AT&T has led the way in 4G LTE coverage, reliability and speeds. Additionally, the firm's fiber and U-verse projects are pacing well and should come in ahead of schedule helping the firm increase its footprint in wireless and broadband coverage.

AT&T continues to steadily grow its revenues and cash flows each quarter. The firm's net profit margin in Q3 of 2013 was 12.14%, an increase from 5.92% in 2012. Additionally, operating margins increased in Q3 of 2013 to 19.24%, an increase from the 10.15% in 2012. AT&T is also known as one of the dividend titans. Having raised its dividend consistently year-over-year since 1984, the company has been very shareholder friendly. The dividend increases are never huge, usually averaging $0.04 annually. It is still a dividend increase. The stock currently yields 5.30%, compared to Verizon's 4.33% yield.

AT&T also mentioned in its Q3 filing that it had bought back $1.9 billion in stock. This is all part of the company's planned 300 million share buyback plan that was authorized back in March of this year. During the third quarter AT&T reported that it had bought 55 million shares. This leaves 216 million still remaining to be purchased in subsequent quarters to meet the 300 million buyback plan. AT&T currently has a book value of $16.23 per share. All things remaining equal (and I know they never are) taking out the additional 216 million shares would give AT&T a new book value of $16.92 per share.

What AT&T should do to maintain value

There is no denying it, AT&T is not a growth company, but instead is a value company. In order for value companies to continue to deliver value and generate a return for its shareholders the company needs to realize that it can no longer grow organically, but instead by acquisition. AT&T has begun to do some of this through its acquisition this past summer of Leap Wireless for $1.2 billion. This acquisition is estimated to help AT&T revenues by $2.8 billion, but it is going to take much more than that for AT&T to continue to maintain its value.

I would suggest that AT&T consider looking at larger telecom plays both here in the US and in Europe. Good candidates could be Vodafone, Orange (NYSE:ORAN) from France, Telecom Italia (NYSE:TI) in Italy, Telenor (OTCPK:TELNY) from Norway, or even Sprint here in the US. I would throw out T-Mobile (NASDAQ:TMUS), but since AT&T has already gone down that path and failed, I will let that one go. Doing a major European acquisition would help AT&T continue to expand its reach globally and also give it opportunity to not only penetrate the wireless space but also the broadband space, similar to what they are working on now in the US.

Below is a listing of the possible acquisition candidates with their current market capitalizations and stock prices as a compared to AT&T.


Market Capitalization

Stock Price










Telecom Italia









All of the above mentioned companies (especially Vodafone) would provide AT&T with significant market share improvement and continued growth. Of course, any major acquisition would need to strike a balance between purchase price and overall revenue improvement, so as to avoid situations where acquisitions are made for the sake of an acquisition and ultimately end up costing the company much more money than originally intended. Caterpillar's (NYSE:CAT) lack of due diligence acquisition of ERA Mining Machinery that resulted in a $580 million write down is a perfect example.

As it stands now, I think AT&T is going to continue to be somewhat limited on its ability to see any major price appreciation until a major catalyst occurs to help propel the stock higher. I do believe that management knows this and is working on ways in which to return more value back to shareholders. I would consider any weakness in the stock pushing the price down to the $32 per share level or lower a great buying opportunity.

Bottom line, I think the stock is going to continue to have difficulty pushing beyond the $36 - $37 per share level in the interim, but I think long term AT&T is a sound investment and will find a way to return greater value back to its shareholders by outperforming Verizon, even if this year proved me wrong.

Disclosure: I am long T, CAT. 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.