Why AT&T Joined The Mile-High Club

Apr.29.14 | About: AT&T Inc. (T)

Summary

AT&T is taking Gogo's services one, and perhaps several steps further, including providing customers connectivity solutions, such as cockpit communications, maintenance operations and crew services.

When you factor the company raised its outlook for the rest of 2014, this is one confident management team.

With 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.

Unsatisfied with its market position behind Verizon (NYSE:VZ) and emerging threats from T-Mobile (NASDAQ:TMUS), telecom giant AT&T (NYSE:T), which has looked for ways to differentiate its services, announced on Monday that it was building a high-speed 4G LTE-based in-flight connectivity service for airlines.

The company wants to offer wireless services to passengers in commercial, business and general aviation. This is a market currently dominated by Gogo (NASDAQ:GOGO), which already has existing agreements in place with American Airlines (NASDAQ:AAL), Virgin American and Delta Air Lines (NYSE:DAL). AT&T said the service will launch in late 2015. But given Gogo's extensive lead, including 6,300 business aircrafts already equipped with its communication services, it remains to be seen to what extent AT&T can emerge as a worthwhile threat.

During the press release, John Stankey, chief strategy officer at AT&T said:

"Everyone wants access to high-speed, reliable mobile Internet wherever they are, including at 35,000 feet. We are building on AT&T's significant strengths to develop in-flight connectivity technology unlike any other that exists today, based on 4G LTE standards. We believe this will enable airlines and passengers to benefit from reliable high speeds and a better experience. We expect this service to transform connectivity in the aviation industry - we are truly mobilizing the sky."

In an email response to the press Monday evening, Gogo spokesman, Steve Nolan said:

"We think it's validation on what a great business Gogo has created that some of the largest businesses in the world want to be a part of it. To compete in this business, we believe you need to be global and have global solutions and that's what we are focused on right now."

But AT&T is taking Gogo's services one, and perhaps several steps further, including providing customers connectivity solutions, such as cockpit communications, maintenance operations and crew services. AT&T plans to work with conglomerate Honeywell (NYSE:HON), which will provide hardware and service capabilities to deliver the in-flight connectivity solution.

AT&T customers now have even more reason to be excited. Recall, the comp kicked off 2014 with a bang after releasing first-quarter results that yielded it best subscriber growth in five years. What's more, its revenue and profit results edged above what everyone was expecting, dismissing notions that the company was losing ground to Verizon, while T-Mobile and Sprint were catching up.

AT&T reported $32.5 billion in revenue, easing past expectations of $32.4 billion. This was right around a 4% year-over-year jump. First-quarter net income came in at $3.7 billion, or 70 cents per share, up from 67 cents per share in the prior-year quarter. And when adjusting for special items - like the costs associated with its acquisition of Leap Wireless - earnings came in at 71 cents per share, beating the Street consensus by a penny, marking an 11% increase over the adjusted 64 cents per share reported for the first quarter of 2013.

All told, when you factor that AT&T raised its outlook for the rest of 2014, predicting consolidated revenue growth of "4% or greater" and free cash flow in the $11 billion range, this is one confident management team. Not to mention, the company projects 2014 adjusted earnings per share growth in the mid-single digit range.

With the stock trading at around $35 per share, AT&T still looks like a solid long-term bet. 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 trade 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. But with potential growth now in in-flight connectivity services, AT&T stock now has bigger wings.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: The article has been written by Wall Street Playbook's tech sector analyst. Wall Street Playbook is not receiving compensation for it (other than from Seeking Alpha). Wall Street Playbook has no business relationship with any company whose stock is mentioned in this article.