AT&T's New Security Service Could Boost Stock 8%

| About: AT&T Inc. (T)

There were two developments in the last two months at AT&T (NYSE:T) which I believe will drive the company sales and profits higher for the remainder of the year and into 2013. First, in April of 2012 AT&T started to sell Nokia's (NYSE:NOK) new Lumia 900 phone powered by Microsoft's (NASDAQ:MSFT) Windows software. One month later, the company announced that it is launching a wireless-centric home security and automation service. I believe that these two new product offerings will provide AT&T with a significant advantage to its major competitor, Verizon (NYSE:VZ), as well as an ability to compete with established home security companies such Tyco's (NYSE:TYC) ADT and other smaller security solution providers.

AdAge expects AT&T to spend $150 million in promoting Nokia's new Lumia 900 phone. This is in addition to Nokia's own advertising and marketing efforts for the handset. Lumia 900 is the first Nokia LTE phone running Microsoft's Windows to be sold in the U.S. AT&T was the first company to offer the iPhone and it is making a similar bet on Nokia's handset. A decent quality Windows phone should be able to compete with Apple's (NASDAQ:AAPL) iPhone. The focus will be on the Microsoft's software as Nokia will be providing only the hardware. So far the Lumia 900 is offering outstanding hardware including 4.3" AMOLED ClearBlack glass touchscreen, capacitive touchscreen, FM Radio, 8 megapixels camera, and a secondary front-facing 1 megapixel camera. In addition, the phone comes with Microsoft office software and is easy to synch and connect with any Windows PC.

I estimate that the new Lumia will sell over 2 million sets in the U.S. in the second quarter. For comparison, AT&T sold 5.5 million smartphones in the first quarter, of which 4.3 million were iPhones. I think the Lumia 900 is the best alternative to an iPhone in terms of software and hardware. In addition, Nokia is a leader in near field communications and Nokia Lumia 900 supports NFC. There are rumors that future Microsoft Windows 8 to be released in the Fall of this year will offer the "wallet experience". This will provide further advantage to AT&T as the official carrier of the Lumia 900. Increasingly, all phones and carriers offer the same basic smartphones, and in my opinion, things such as NFC capabilities, FM radio, and superior camera will make a difference in this highly competitive area. While the Lumia 900 start is not without criticism and bumps, I think the future for a AT&T, Nokia, and Microsoft partnership is off to a good start.

In addition to launching the Nokia's Lumia 900 phone, AT&T recently announced a new wireless-centric home security and automation service. The home automation and security industry is a multibillion industry and growing. I think AT&T entry into this market is a very smart move for several reasons. First, AT&T is already in your home probably via cable or internet service. I believe it is easier to set up a centralized monitoring and communication system around the existing AT&T infrastructure. Second, AT&T has excess bandwidth and this new market will provide additional revenues without significant capital outlays. I estimate it will be accretive to earnings per share in 2013.

The largest player in the security area is Tyco with its ADT brand. In 2011, Tyco's security solutions generated $8.6 billion in revenue and $1.4 billion in operating revenues. Also, the home security market has many smaller participants. I believe AT&T security and home automation solution will be able to gain market share from Tyco's ADT as well as smaller companies by offering easy to use and inexpensive home monitoring and automation.

Several years ago the triple play, which includes land-line phone, internet, and cable TV, set apart the major cable companies from the smaller ones. Soon AT&T will be offering the quintuplet play: wireless phone, internet, cable, land phone, and home security and automation. I believe AT&T will be able to gain customers in the home security and automation area by offering good quality, low prices, and certain incentives to its existing customers to try its new product. AT&T wireless had nearly 104 million subscribers and AT&T U-Verse and internet service had another 6.2 million.

Assuming AT&T is able to sell the new service to a third of its existing customer base, this will be about 37 million subscribers just from the existing customer base. Assuming a monthly price of $10 and a net margin of 10%, this will be generating $4.4 billion of additional revenue and about $440 million in profits per year for AT&T and its shareholders. An incremental $440 million in profits translates to $0.07 net earnings per share. At the current price to earnings ratio of over 40 an additional $0.07 earnings per share should boost AT&T stock by $2.8 per share. This represents an 8% premium to AT&T stock price today and is in addition to an annualized dividend yield of 5.3%.

AT&T has proven execution skills. It proved this with the first launch of the iPhone when it was the exclusive service provider for a few years. I think AT&T should be able to grow its revenues and earnings because of its exclusive offering of Nokia's Lumia 900 and the introduction of a home monitoring and automation service. The extent and the opportunity these two new products and services will provide is difficult to measure quantitatively and precisely at this time. However, I think buying AT&T stock before the outcome is certain makes a lot of sense.

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