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Summary

  • AT&T has acquired prepaid wireless provider Leaps Wireless International Inc. in a deal worth $1.3 billion.
  • AT&T will further expand its 4G LTE network through Leap's Cricket brand in 35 states of the U.S.
  • The industry is turning in favor of AT&T's core operations.
  • AT&T's stock is currently trading at a lower P/E compared to the industry average.

AT&T (NYSE:T) has acquired prepaid wireless provider Leap Wireless International Inc. that operates under the "Cricket" brand. Cricket's network currently covers approximately 97 million people in 35 states of the U.S., and had 4.57 million customers as of February 2014. Through this $1.3 billion acquisition, AT&T has acquired Leap's stock and wireless properties, including licenses, network assets, and retail stores.

In the coming weeks, Cricket will be combined with AT&T's existing operations to create the new Cricket. The existing customers of Cricket may visit a new Cricket store at their convenience to purchase a device and service plan that will give them access to a reliable and nationwide 4G Long-Term Evolution (LTE) network so they can experience great coverage from coast-to-coast with no roaming charges.

In addition to the Cricket operation, AT&T has also acquired some valuable spectrum in the PCS and AWS brands, covering approximately 138 million people and enhancing the spectrum base of the company. AT&T will immediately begin to utilize the spectrum to support 4G LTE services for its customers. The additional spectrum will provide additional capacity and enhance the network performance for customers that use smartphones and other internet devices.

I believe this takeover will be a value addition for the company by improving its position in the wireless industry, compared to peers like Verizon Communications Inc. (NYSE:VZ) and Sprint Corporation (NYSE:S). In addition, AT&T will also receive benefits from more customer care service facilities, low-cost data plans, and robust financial resources. Further, this takeover deal will also provide a strong prepaid business line with the incorporation of the Cricket brand that will definitely boost the company's revenues in coming years.

Industry Growth

The growth in mobile data traffic is expected to increase at an annual rate of 61 percent in the next five years. The increasing number of wireless devices accessing mobile networks worldwide is one of the major contributors to global mobile traffic growth. According to the Cisco Visual Networking Index, in fiscal year 2013, approximately 526 million mobile devices were introduced in the market, and the number of global mobile devices and connections will grow to 10.2 billion by 2018, at a CAGR of 8 percent.

(click to enlarge)

Source: Cisco Visual Networking Index

North America and Western Europe are going to have the fastest growth in mobile devices and connections, with CAGRs of 12 percent and 10 percent respectively from 2013 to 2018.

The growing mobile traffic will significantly benefit the top line of the company, since AT&T is widely used in the United State and internationally. In addition, the recent acquisition of Leap Wireless will also increase the customer base and market share of company in the United States, and will further boost the company's revenue in the coming years.

Currently, 3G and 3.5G account for approximately 60% of mobile data traffic, while 4G will grow to represent over half of all mobile data traffic by 2018. In addition, the LTE subscriber growth trend, especially in North America, will increase by a monthly average of approximately 20 percent in fiscal year 2014.

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Source: Alcatel-LucentResearch

AT&T has a strong foothold in the wireless business, and continues to capture additional market share via its robust deployment of the 4G LTE network. AT&T has rapidly expanded its 4G LTE network; in fiscal year 2014, the company plans to expand its 4G LTE networks to nearly 300 million people, and will approximately cover 99% of all customers' locations in 22 states of the U.S.

This expansion is a part of the company's three-year investment plan called Project Velocity IP that started in 2012, and it is expected that through this project, the company will provide high-speed internet access, new mobile apps, and cloud-based services to its customers by the end of 2015.

Valuation

On the basis of fundamentals, the stock is currently undervalued. Currently, the stock is trading at a lower trailing twelve-month P/E ratio of 9.6X, compared to the industry average P/E of 19.5X. In addition, the company's operating margin currently stands at about 24%, compared to the industry average of 16.6%, and the net profit margin of 14.2% is more than double the industry average of 6.3%. Furthermore, the ROA and ROE metrics also indicate that the company is using its assets and funds more efficiently than its comparable peers in the industry. The company's ROA of 6.6% is greater than the industry average of 3.1%, and the ROE of 19.9 also beat the industry average of 10.4.

Conclusion

The acquisition would significantly add to AT&T's revenue by allowing Cricket customers to access its 4G LTE network and effectively adding a huge incentive for current Cricket subscribers, while expanding the company's network at the same time. Furthermore, the acquisition will enhance the company's presence in the prepaid wireless space. Currently, the stock is also trading at a lower P/E compared to the industry. I believe that the company is a good candidate for long-term investment, because the industry is also turning in favor of the company's core operations and the recent acquisition will also boost the company's revenues in coming years. On the basis of all these facts, I will give this stock a buy rating.

Source: Is AT&T Trading At A Discount From Its Peers?