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Summary

  • On fiscal 2015 estimates of $2.83, AT&T shares still trade at a P/E of 12, which is 2 points below the industry average.
  • The stock, which has a 52-week high of $39, is trading at just 10 times trailing earnings.
  • On the basis of free cash flow growth, and potential margin expansion through efficiency improvements from the Leap acquisition, shares should trade at $40 within the next 6 to 12.

You will be hard-pressed to find a company that has been as successful and dominant, but remains mostly criticized than telecommunications giant AT&T (NYSE:T). With shares down 7% over the past 12 months, the prevailing question continues to be about growth, and whether the company has what it takes to deliver the sort of market-beating performances seen from rival Verizon (NYSE:VZ). But it's not as if AT&T hasn't tried.

The company has always had global ambitions. Recall, last year there was the rumored deal for Telefonica (NYSE:TEF), which was ultimately rebuffed by the Spanish Government. Telefonica had the sort of business from which AT&T could create incremental value. It just wasn't meant to be. Then AT&T turned its attention to Leap Wireless, which it bought for $4 billion.

Although this was a much more cost-effective deal (versus $150 billion for Telefonica), investors never really bought into how Leap made AT&T any better. Instead, it was seen as AT&T throwing good money after bad just for the sake of flexing its financial muscle. But AT&T saw it as a way to keep Leap out of the hands of smaller rivals like T-Mobile (NYSE:TMUS) and Sprint (NYSE:S), while at the same time helping it to acquire more spectrum to keep up with Verizon. Regardless of its reasons, not much value has been created from this deal, and investors are getting restless.

On Tuesday, the company will release its quarterly report. With competitive pressures heating up in the industry, investors want reasons to still believe in the company. But it's not time to overreact. AT&T has been through this before. And the company has enough experience with price wars in the U.S. wireless market to make the most out of any potential risk with growth.

For this reason, analysts remain positive about the Tuesday's results. The Street will be looking for AT&T to report earnings that are up 8% year over year. The consensus estimate is 69 cents per share, which is up 5 cents from last years mark of 64 cents. In fact, over the past 30 days, consensus estimates have risen from 68 cents. For the fiscal year, analysts are projecting earnings of $2.71 per share.

In terms of revenue, AT&T is projected to report sales of $32.39 billion for the quarter, which represents an increase of 3% year over year from last year's total of $31.36 billion. For the full year,analysts are calling for revenue of $132.16 billion. Recall, AT&T has posted revenue increases for three consecutive quarters, including a 6% jump in the January quarter, which produced revenue of $33.16 billion.

Also, in the most recent quarter, AT&T added more than 2 million new subscribers to its wireless and high-speed broadband service. This led to a 20% jump in adjusted earnings. The company was able to do generate significant interest from smartphone users even as Sprint and (especially) T-Mobile pushed hard with aggressive pricing plans.

AT&T's smartphone business, which makes up over 90% of the company's phone sales, still posted growth. The company's strong wireless-segment climbed 5% and wireless-data sales soared by 17%. From my vantage point, investors' fears about the competition have been slightly misguided. While the prospects for a more serious price war are may eventually escalate, AT&T management has shown a strong track record to deliver on the bottom line, where it matters the most.

With the stock trading at around $36 per share, I would be a buyer here ahead of Tuesday's report. The stock, which has a 52-week high of $39, is trading at just 10 times trailing earnings. And even when we factor the valuation on fiscal 2015 estimates of $2.83, AT&T shares still trades at a P/E of 12, which is 2 points below the industry average and 1 point below AT&T's historical average. On the basis of free cash flow growth and potential margin expansion through efficiency improvements from the Leap acquisition, shares should trade at $40 within the next 6 to 12 months.

Source: Why AT&T Is Heading To $40