By Matt Doiron
Scott Ford, a member of AT&T (T)'s Board of Directors, directly purchased 55,000 shares of AT&T on Monday at an average price of $37.43, which comes out to a little over $2 million of stock. Insider Monkey has found that insider purchases tend to be bullish signals on a statistical basis and this makes sense from a logical point of view as well: in order for an insider to concentrate a large share of assets in the company rather than diversifying, that insider likely must have confidence in the company's prospects and believe that those prospects are not being recognized by the stock market.
The $220 billion market cap telecom company is up about 25% this year after beating earnings estimates in the first two quarters of 2012. In the second quarter, AT&T reported earnings per share that were 10% above the figure for the second quarter of 2011. Financial players expect this growth to continue: the current market price for AT&T shares represents a multiple of 51 on trailing earnings, implying that the market expects strong growth, and sell-side analysts offer estimates that bring the forward P/E down to 15. Investors who want to add a growth stock to their portfolios but have concerns about U.S. macro prospects should also be attracted to AT&T's beta of 0.5, meaning that it has a fairly weak relationship with the movements of the broader stock market. Finally, AT&T pays a 4.7% dividend yield, which combined with its large size and low vulnerability to market conditions - as well as the expectation that its earnings will rise in the future - make it a good income stock.
Digging deeper into AT&T's released 8-K for Q2 2012, the company saw wireless subscribers rise by 1.3 million and it now has 105 million subscribers compared to 99 million a year ago. The wireline business is declining as less revenue is earned from business customers, but so far AT&T has been able to more than match the fall in revenue by cutting costs and increase the division's margin in the second quarter compared to the same period the previous year. The company also confirmed that it intends to continue to buy back shares and return cash to investors through that channel as well as through its substantial dividend.
Phil Gross and Robert Atchinson's Adage Capital Management reported ownership of 8.2 million shares of AT&T at the end of March. Adage has been reducing its stake over the past year but still had a sizable position (see other stock picks from Adage Capital Management). AQR Capital Management, run by Cliff Asness, held 4.8 million shares of AT&T at the end of the first quarter. This position, which was an increase of 24% compared to AQR's holdings at the beginning of the year, was Asness's fourth-largest 13F position.
AT&T's two closest public peers are fellow telecoms Verizon (VZ) and Sprint (S). These companies are smaller, with market caps of $129 and $13 billion respectively. Of the two, Sprint is in a more difficult business position: it is experiencing moderate revenue growth for a telecom company but is unprofitable on a trailing basis and is not expected to have positive earnings per share next year either. Its lower pricing may help it attract customers, but it will take time to execute any turnaround.
Verizon is in a similar place as AT&T multiple wise, with a trailing P/E of 45 but sell-side expectations implying a forward P/E of 16. Verizon also narrowly tops AT&T in terms of number of subscribers, making it the market leader in the U.S. In Verizon's most recent quarter, it reported a 13% rise in earnings compared to the same quarter in the previous year. While Verizon pays a competitive dividend yield of 4.5%, the beleaguered Sprint does not.
We would avoid Sprint, and see little daylight between AT&T and Verizon. AT&T can also be compared to Canadian telecom BCE (BCE), which posts a $33 billion market capitalization. It trades as more of a pure value play with a trailing P/E of 14 and a forward multiple of 13, edging out the American telecoms with a 5.0% dividend yield. It too saw strong revenue growth in its last quarterly report. From a value perspective, we are more comfortable with the fact that BCE has already delivered the earnings necessary to justify its stock price. In the first quarter, BCE reported 75 cents per share of earnings, narrowly ahead of the 74 cents analysts had expected. This was a double-digit percentage increase from the same period in 2011. Its trailing P/E makes it look reasonably valued, compared to the other telecoms whose price depends on delivering future growth but think any of the three large telecoms (AT&T, Verizon, and BCE) are good income plays.