Is AT&T Worth $50 Per Share?

| About: AT&T Inc. (T)

AT&T Inc. (NYSE:T) offers telecommunication services to consumers, businesses, and other providers globally. The company specifically engages in wireless communication services, roaming and long-distance services.

Contrary to the general picture of the stock market, AT&T started a strong run-up in April/May of this year, propelling the stock up to $35.35 a share. Is this a sustainable increase in price? The boost the stock received in May is surprisingly accompanied by an average volume, which indicates that momentum investors are not invested yet. The increase in valuation also defined a new short-term trend canal that is even steeper than the "longer"-term trend depicted below. That said, on a technical level, the stock has still upside to $36.2, which should be the next test. Chartists might find AT&T interesting when the stock hits and breaks its resistance level at $35.8.

Value investors, on the other hand, are more interested in the intrinsic value of AT&T. Of course, AT&T operates in a competitive industry—competitors are Verizon Communications (NYSE:VZ) and Vodafone Group plc (NASDAQ:VOD)—where technology and innovative capabilities play an important role. AT&T has a gross margin of over 50%, which shows that the company can translate its innovation into tangible ratios.

Currently, the stock trades at only $35.35 and has a P/E ratio of 14, which is low compared with the scale of operations, technological know-how, strong cash flow and balance sheet (leverage ratio of 0.55), and very attractive dividend yield of 5%. All these items convince me to assign a multiple of 18x earnings. Since AT&T is a S&P 500 company and has a consistent earnings record, I consider the dividend to be very secure.

I estimate AT&T to earn a 2013 EPS of $2.80, which is at the high end of analyst estimates ranging from $2.35-$2.76 per share. Applying a multiple of 18x forward earnings yields a price of $50.4 as intrinsic value, giving the stock plenty of room to reach its fair value.

I have initiated a Call position in AT&T with a short-term price target of $42, which could be reached sooner than later once resistance levels are broken and momentum increases. A current quote of $35 a share close to its 52-week high of $36.21 shows that the market is eager to send AT&T higher.

Disclosure: I am long T.