On April 8th, Nokia (NOK) will release its highly anticipated Windows Phone, the Lumia 900, and will officially partner this launch, somewhat surprisingly, with AT&T (T). The company that was so protective for so long of its iPhone exclusivity has eagerly jumped at the opportunity to market and distribute a competing product, and this alacrity has been seen by many investors as an indicator both of the potential success of the Lumia and of the potential revenue streams AT&T may have the ability to reap from its sale. At $99.99, the Lumia is quite affordable and could thus represent a very lucrative product for the telecommunications giant, but does the potential benefit of this single product outweigh the many chinks in AT&T's armor? A review of AT&T's sales figures, fundamentals, and balance sheet should give pause to any investor targeting AT&T as a potential buy.
From the outset, it should be clear to most savvy investors that many of AT&T's sales figures, while outpacing both Sprint-Nextel (S) and T-Mobile, have lagged significantly behind those of Verizon (VZ). AT&T gained 717,000 subscribers on contract plans in the fourth quarter of 2011, which is an encouraging figure, but still trails well behind Verizon's addition of 1.2 million subscribers in the same period. Moreover, investors can be assured that this differential is not an anomaly: AT&T has now been trailing in this arena for more than a year.
AT&T's fundamentals, furthermore, should be equally unconvincing for potential buyers. The telecom outfit's quarterly revenue growth has been outpaced and, in fact, doubled by Verizon. Perhaps worse, its meager return on equity of 3.8% falls well short of Verizon's much more encouraging ROE of nearly 12%, and its return on assets is 2% short of Verizon's, indicating less efficient and effective management than its largest competitor.
The telecommunications sector has been, for some time, burdened by a few key factors that render most of the stocks therein far less attractive than they might otherwise be: high PEG ratios and high debt-to-cash ratios. AT&T's PEG is sitting at 1.71, which, viewed through the lens of Graham-Dodd value investing, would indicate significant overvaluation of the company. It's certainly true that Verizon also has a less than desirable PEG ratio of about 1.24, but this is also quite a far cry from the overvaluation that AT&T's PEG ratio is signaling.
Moreover, and more discouraging, the telecommunications sector is utterly ridden with debt, and AT&T epitomizes this pattern: AT&T is stuck with over $64 billion in debt while only maintaining about $4 billion of cash on hand. For a company (especially a technology or R&D outfit) in a significant period of growth or expansion, high debt-to-cash ratios can make some temporary sense, assuming a high future return is expected. AT&T, however, is in no sense an aggressive growth company; just look at its quarterly revenue growth and near-term prospects. The company, as of last year, is no longer cornering the market for iPhone sales, and while neither Verizon nor Sprint have caught up in that regard, the failed T-Mobile merger of late 2011 did nothing to help AT&T's prospects for growth. Of course, discussion of the outfit's short-term prospects brings us back to the April 8th release of the Lumia. Admittedly, the Lumia could represent a very powerful product for AT&T; however, given many of AT&T's intrinsic and long-term issues, it seems as though the release of a single new product does not in itself justify a position in AT&T.
All this observation of AT&T's many weaknesses is not to downplay its potential strengths. Perhaps most enticing to investors is AT&T's hefty dividend yield of 5.50%, a yield not even matched by its most significant competitor Verizon. Additionally, AT&T has maintained its established trend of increasing its dividend at the beginning of every fiscal year, this time raising it from $.43 to $.44, an undoubtedly encouraging sign for investors. However, investors must ask themselves if these ever-increasing dividend payments are truly sustainable under AT&T's current burdensome debt structure. Will a growing dividend simply put increasing strain on an already encumbered balance sheet?
Ultimately, potential buyers of AT&T should weigh the positive signs of the Nokia partnership and dividend increase against the more negative indicators of the company's sales figures, fundamentals, and debt structure. Does a potential, but probably temporary, pop in AT&T's share price thanks to the release of the Lumia justify a potential incursion of capital loss not too far down the road thanks to AT&T's intrinsic flaws? Indeed, will AT&T's Lumia privilege even make that much difference, considering that its two largest competitors Verizon and Sprint haven't shown any real interest in acquiring Nokia's next big thing? To this investor, when all factors are taken into account, current hype surrounding AT&T appears to be much ado about nothing.