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I wrote an article entitled 'Why AT&T Still Has Potential' back in December of 2013, when the price was around $34 per share. Since then, AT&T (T) stock has come down considerably. It now is trading for around $31.50-$32 per share. At today's market price, I have to say that I like AT&T even more than I did back in December. This stock has gotten deeply discounted and hated by the street, even with positive quarterly numbers and guidance provided during the 4th quarter.

When AT&T announced its 4th quarter earnings earlier this month of $0.53 per share and $33.2 billion in revenue, both numbers beat the consensus estimate of $0.50 per share and revenue estimates of $33.06 billion. The company added 566,000 postpaid subscribers and 1.2 million new smartphones to its network. The firm also increased its dividend by $0.01 again this year, bringing the new total payout to $1.84 per share. AT&T announced that it had bought back $1.9 billion (54 million shares) in the 4th quarter, bringing the full year buy-back total to $13 billion, decreasing the outstanding float by 6%.

Even with the beat on earnings and the in line forward guidance that was provided, the street is still very concerned that the prospect of strengthening domestic competition will continue to eat into revenue. In the past year, both T-Mobile (TMUS) and Sprint Inc. (S) have turned up the heat on domestic rivals AT&T and Verizon (VZ) by offering customers the ability to switch over to them at no cost, even offering to buy out their existing wireless contract. Additionally, the lure of unlimited data, cheaper fees, and no contracts is a very compelling reason to switch to Sprint or T-Mobile. In the past three quarters alone, T-Mobile has added 2.1 million new customers.

To combat this, AT&T moved forward with a short-lived plan to pay customers $200 for every line that was brought over from T-Mobile, with a $450 benefit maximum. The offer was publicized as a limited-time offer. Yet, after only a month of run-time, the promotion has been discounted and replaced with the firm's new family wireless plan price cuts that were announced earlier this week. This deal is aimed at reducing the overall cost to family plans around data usage. Making the firm's cost-competitiveness much more in line with that of Sprint and T-Mobile. That being said, the street did not act favorable to this new offer and sold off the stock, pushing it down over 4% on Monday for fear that this new plan will negatively affect margins and revenue.

It was also announced last week that AT&T would no longer be pursuing a bid for Vodafone Group Plc., a plan that was originally designed to help AT&T gain more exposure in Europe. Given this news, it would indicate that AT&T instead wants to spend its efforts on increasing its customer base domestically, while also working to further expand upon its current network.

The market, however, has priced in a near-death scenario for this stock, believing that the dividend will be cut, guidance will cut, and revenues will dramatically decrease due to the firm having to continue to cut into margins to be competitive. I, on the other hand, view this as an excellent buying opportunity to pick up a great company that will continue to deliver shareholder value. Don't just go off of my opinion, take a look at the metrics and decide for yourself. Let's examine the evidence as to why the street is overreacting and current pricing just doesn't make sense.

Stock Repurchase:

The company said that in the 4th quarter that it bought back $1.9 billion in stock, bringing the annual total to $13 billion. AT&T has been doing most of these purchases through financing and taking advantage of record low rates. These repurchases are all part of the company's longer-term buy-back plan of 300 million shares announced last year. Through these buy-backs and strengthening of the balance sheet, the firm has seen its book value increase by 5.24% in the past year

  • 2012 - $16.54
  • 2013 - $17.41

Dividend Stability:

In looking at today's current market price compared to where it was just a month ago, it seems that the street is pricing in a dividend cut. I just don't see that, nor do I believe that management would allow that happen, especially after they just raised the payout a few weeks ago. In 2013, the dividend payout cost the firm $9.6 billion. Given the new dividend of $1.84 per share and assuming a similar number of shares will be repurchased this year from the planned buyback, I think it is safe to assume that this year's dividend will cost roughly $8.9 billion.

From a sustainability standpoint, $8.9 billion is very affordable for the company. The current payout is around 55% of earnings, which is manageable. Aside from the $7.2 billion in cash and investments that the company has on hand, free cash flow this last quarter represented $13.8 billion and estimates for 2014 are around $11 billion. Both numbers provide the company with plenty of cash to still service the dividend, even one that is $0.04 higher than last year.

2014 Outlook:

In 2014, AT&T expects to deliver revenue growth in the range of 2%-3%. Margins that are currently at around 60% are expected to remain stable. EPS growth is expected to be in the mid-single digits. Free cash flow is expected to be in the $11 billion range, with capital expenditures in the $21 billion range.

Value Compared to the Competition:

AT&T

Verizon

Sprint

T-Mobile

Forward P/E

11.43

12.06

0

57.94

PEG

1.97

1.48

0

211.67

Dividend Payout Ratio

55%

53%

0

0

Profit Margin

14.17%

9.54%

-9.34%

0.21%

Total Cash

$7.2B

$57.5B

$7.49B

$2.3B

Return on Equity

20.15%

26.03%

-18.88%

0.45%

Price to Book

1.84

3.44

1.26

1.86

Debt to Equity

0.81

0.98

1.27

1.66

Given everything that I have listed above, I think that AT&T at its current price presents an excellent value opportunity compared to its peers and the fact that the "end of the world" scenario that the market is pricing in is highly unlikely.

Source: The AT&T Fire Sale