AT&T (NYSE:T) has shown mixed price performance since the start of the year - the stock has gained almost all of its lost value after a dip of about 8% at the start of March. Year-to-date, the stock is down about 0.6%. In our last article, we conducted a fair value analysis of the stock based on EV/EBITDA multiple - you can read that article here. In this article, we will focus on the future growth prospects of the company from different segments along with the acquisition of DirecTV (DTV).
The triple-play telecommunication brand of AT&T is currently one of the valuable segments of the company. In the first quarter earnings, the number of U verse connections grew with a robust 30% growth rate. However, an important thing to notice is that most of the new connections were taken by the existing customers of AT&T, which previously were using traditional DSL and TV. Therefore, we saw an almost equal drop in old service connections.
Although both these changes should offset each other since most of the customers who took U-verse connections were existing; however, this is not the case here. Firstly, a customer simply using a DSL connection or traditional TV is only using one service of the company. Whereas, when the same customer shifts to U-Verse, he is offered new and attractive package deals and the same customers are motivated to take all three services of the company. Therefore, the company is offering a wider array of its products line to its customers through this technological transition, which will keep growing its overall revenue.
J.D. Power conducted a survey in the last quarter of 2013 to find out which vendor has the most satisfying service in the eyes of customers. The study is based on 22,593 responses, which were taken in four different periods evenly distributed over the year. This would take into consideration the changes in weather over the year. In addition, the results are based on four different regions as weather greatly varies in these areas. Also, some companies have better coverage in some particular areas while others excel in the other areas. Based on these factors, following results were obtained. AT&T scored at the top of the list in the North Central region, second in the South region, fourth in the west region, and was nowhere to be found in East region with Verizon FiOS at the top. Verizon is also ahead of AT&T with a second position in the West region.
The above consumer survey represents great potential in AT&T's service especially in the North central and the South region, which has the potential for more customers in the future. In the other two areas, the company is aggressive in expanding its network in new areas and this plan is in effect since the start of 2014. Under this plan, AT&T will enable new U-verse connections to 1 million new business customer locations. As soon as these connections are operational, we will see some serious growth in the company's revenues.
AT&T is about to acquire DirecTV which will open new possibilities for the company. According to the above study, DirecTV was rated third in North Central region, first in South region and third in both West and East Region. This merger would allow AT&T to enable better service and to penetrate in the less covered areas such as East region with great ease. In addition, AT&T's services bundled with DirecTV would form attractive packages, which will bring in more customers. AT&T will buy DirecTV for $48.5 billion. The company expects to save $1.6 billion a year with this acquisition as reported in AT&T's regulatory filings.
U-verse has proved to be a valuable asset to AT&T - this segment accounted for 29% of the overall growth in revenues. The company's expansion plans in this segment will drive future growth. Furthermore, the acquisition of DirecTV will enhance the market share of the company in the segment. The cash outflow of about $49 billion has not excited the market, and the performance of the stock has been mixed over the last few weeks - however, the long-term impact of the DirecTV deal and the growth in U-Verse customers will be beneficial for the company. We believe these deals will play a vital role in the future growth of the company.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.