Is AT&T Undervalued?

May.15.14 | About: AT&T Inc. (T)

Summary

EV/EBITDA multiple shows that the stock is trading at a discount compared to its peers.

The trend in the stock price has changed and it might be a good time to consider AT&T.

AT&T will be a solid addition to any income portfolio with conservative growth.

AT&T (NYSE:T) has grown slightly (3.7%) since the start of April when we last wrote about the stock. The trend in the stock price was downwards till March, where the stock price bottomed, and since then, the trend has reversed and the stock price is moving up. We have assessed the dividends and future growth prospects of the business in our previous articles - in this article, we will focus on the valuation of the stock.

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The method of valuation used for AT&T is EV/EBITDA. Enterprise value is the value that a prospective buyer will have to pay for the whole company. This measure values the business of the company instead of just valuing the company. I believe this measure provides a better picture than the market capitalization as it also includes the debt of the company. If a buyer were to take over a company; he/she will have to assume the debt of the company as well and the buyer will get the cash and other liquid assets of the company, which can be used after the takeover. In order to calculate the enterprise value, we add debt, preferred share capital, and the minority interest to the market capitalization of the company, and deduct cash and cash equivalents - the resulting value is the enterprise value of a company.

Our calculations show that the current enterprise value of the company is around $264 billion, which puts its per share enterprise value at around $51. At the moment, the stock is trading close to $36 per share, substantially below the enterprise value. However, as enterprise value adds debt, preferred capital and the minority interest to the market capitalization; the enterprise value will typically remain higher than the market price. A better metric is the comparison with the earnings before interest, taxes, depreciation and amortization (EBITDA). In order to make it more meaningful, we also calculated the EBITDA value for the company, which was close to $50 billion for the last year. The EV/EBITDA multiple for AT&T stands at 5.3. EV/EBITDA ratio is a better measure than the conventional P/E ratio as it is not affected by the changes in the capital structure.

AT&T

Sprint

Verizon

EV

$264

$62

$305

EBITDA

$50.10

$3.70

$49.00

EV/EBITDA

5.3x

16.8x

6.2x

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Source: SEC Filings

According to our above findings, AT&T has the lowest Enterprise multiple as compared to its peers. Looking at only the EV/EBITDA multiple might not give the true picture of valuation - however, prospective buyers usually prefer lower EV/EBITDA multiple as the lower multiple means the buyer will be able to recoup the invested money in less time. However, comparing the EV/EBITDA multiple with other players in the industry makes it more meaningful and shows where the stock stands in the industry.

AT&T has the lowest multiple among its peers, and its EBITDA figures clearly beat that of its competitors. Recent increase in the debt for Verizon (NYSE:VZ) has caused its enterprise value to go up substantially - however, Verizon also remains an attractive pick in the telecom sector and its EV/EBITDA multiple is also on the lower side. AT&T, on the other hand, looks extremely attractive based on the EV/EBITDA multiple - furthermore, the fall in the stock price since the start of the year also gave a good entry point to investors and we believe the upward momentum in T will continue. Sprint (NYSE:S) has the highest EV/EBITDA multiple due to a lower EBITDA and high enterprise value.

Furthermore, the company had 8% more in cash and cash equivalent in the last reported earnings as compared to the same period last year. AT&T's revenue growth is on the weaker side as compared to the industry but it has better operating profit margin of 23.7% as compared to the industry average of 19.1%, which results in better profitability than its competitors.

Conclusion

Based on the discussion above, AT&T is the most attractively priced stock in the sector. We have maintained that AT&T will be a solid addition to any conservative income portfolio as we believe the stock price will continue to appreciate at a steady pace along with considerable growth in dividends. The trend in the stock price has reversed and the overall trend has been upwards over the last two months - we believe this trend will continue over the next few months.

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

Business relationship disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. IAEResearch is not a registered investment advisor or broker/dealer. This article was written by an analyst at IAEResearch and represents his/her personal opinion about the companies mentioned in the article. The article is for informational purposes only and it should not be taken as an investment advice. Investors are encouraged to conduct their own due diligence before making an investment decision. I am not receiving any compensation (other than from Seeking Alpha) for this article, and have no relationship with the companies mentioned in the article.