AT&T Inc. (T) provides telecommunication products and services to consumers, businesses, and other telecommunication service providers under the AT&T brand worldwide. The company’s wireless segment offers wireless voice communications services, including local wireless communications, long-distance, and roaming services with various postpaid and prepaid service plans. This segment also supplies various handsets, wirelessly enabled computers, personal computer wireless data cards, and accessories.
How well is the company growing?
With every business we want to know if they are growing. Why would we put money into a business that is not growing? The best way to understand if a company is growing is to compare it to the industry as a whole. Since T is part of the Domestic Telecom Services, that is what we will compare it to.
Over the last year, the industry as a whole has grown in sales by 7.4% T has not faired so well, growing at a snail-like pace of 0.30%. This is a huge difference! Net income has not faired so well for either the industry of T. Overall they lost income by (20.80%) over the previous year while the industry fell off the cliff with them to the tune of a negative (19.70%). Neither have faired so well over the last year. So if we look longer we start to see some strength for T. Over a 5 year span, T has grown in sales by 24.74% while the industry came in
a distant 15.91%. Net income is even more outstanding. T has a 5 year track record of 20.28% while the industry as a whole is much less at 7.93%. Even though the last year has not been kind to T, they have a proven track record..
Our conclusion - this company has grown well until recently! We give it a "B-".
How valuable is the stock?
How does one know how valuable a stock is? Cash is king! If this is the case, does T have what it takes? When we think about value we have to think about the potential growth. How much potential? Something called the price to sales ratio gives us the best indicator of this. The more money a company has coming in through sales compared to how much working capital it has speaks volume of its health. The lower the price/sales ratio, the healthier it is. If we compare T to its industry, we find they are almost neck & neck. The industry comes in with an 1.23 ratio while T stands at 1.17.
If we take “cash is King” seriously, then the second most important thing we need to consider is how much money is flowing through this company as compared to its price. This is called the price to cash flow ratio. The closer the ratio gets to that magical “100” the less capability a company has. “100” means it can just pay its bills because the value of the company is equal to the amount of money coming in and no more. The industry stands at 4.40 while T comes close again at 4.50. There is not much difference. T stands around industry average.
Since we compare companies to their industry to define their health there are two more ratios that we consider. Each ratio is defined by how low it is. The lower the better value the company has. The price to earnings ratio (P/E Ratio) gives T a huge edge. It shows that T is a really good buy compared to the industry. T comes in at 12.90 while the industry average is 19.50.
Our conclusion - T is still under valued and a good buy! We give it a “B+”.
How profitable is the company?
If a company has a good sales force and the money is flowing, that is a possible good sign for an investment. But alone, this is not good. What if a company brings in money but then spends it as fast as it brings it in? What if it costs them almost as much to make a sale as it does to sell? These are important things to think about and know if you are going to put your money into a company. To know things like this, I would ask the question: “How much money is left over from a sale after you pay all your costs to make that sale?” This is called the gross margin.
Comparing the industry to T, the industry comes in at 57.70%, so for every dollar sold, 57.7 cents is left over. It costs the industry 42.3 cents to make one dollar. T’s gross margin is 54.7%. Not as good, but very close. The only other question I would ask is: “How good is the company at controlling its costs?” This is sometimes referred to as the net profit margin. If we divide the net profit by net revenues we come up with a %. The higher the % the better at money management the company is. The industry’s net profit margin is 10.4%. So, for every dollar they make (after taxes) their REAL profit is 10.4 cents. T comes in at 9.90%! They are a little less profitable than the industry as a whole. The 5 year margins also have T behind the Industry as whole by small margins.
Our conclusion - this company is just average in profitability! We give it a “C”.
Can the company pay its debts?
With the financial collapse in 2008 of the markets and all the companies that would have gone under because they could not pay off their debt, we like to know how strong a company is before we are willing to invest our money in it. “Here today, gone tomorrow” is not something we think wise.
The first question we would ask any company is how much debt has you accumulated as compared to the amount of money and/or property you own? This is known as the debt/equity ratio. If a company has potential for growth it will have a lot more cash than it would debt. The industry ratio is 1.29 this means that on a whole; companies in this field have financed the majority of their assets through debt. This industry on a whole is a bit high. T is not in the norm for the industry they pop up a very healthy .68 that is light years better than the average company they are compared to.
And the second most important thing to look at is a company’s ability to pay the interest on its debt. Who wants to invest in a company that can barely pay its interest while its debt just grows fat and happy? This is called the Interest Coverage Ratio. The lower the ratio the higher the burden of debt is on a company. The ratio for the Domestic Telecom Services is 6.70. T boasts a better 8.80! It handles it debt a bit better than the industry as a whole.
Our conclusion - this company can handle its debts very well. We give it an “A-”.
Disclosure: No position