AT&T (T) has had a dynamite year with the shares currently up 23% year-to-date and with a 4% dividend yield; most investors are more than satisfied. Despite such a strong bullish upward move this year, I believe that the current action is simply unwarranted. Through an examination of the fundamentals of the organization, I will seek to show the reader why the stock is due for a correction.
A traditional public organization seeks to maximize shareholder value. It does this through a variety of projects, acquisitions, and other undertakings which should ultimately add to the value of the firm. Over the past year, AT&T has added over $50 billion in value to shareholders. This value, in my opinion, is due to investor speculation rather than true value which arises from legitimate business operations.
The first data set I analyzed to determine AT&T's growth was the revenue growth rate. If a firm is truly generating market-beating performance, then surely its revenues should be growing at a substantial rate.
As can easily be seen in the chart above, revenues have not grown at more than 2% per year in the past four years. Additionally, revenues are actually growing at such a slow rate that the company currently is flirting with declining revenues. In such a low growth environment, the prudent investor must begin to question if the recent rally in prices has been based on market speculation or true company performance.
In light of current negligible growth rates, investors should begin to ask how the company is actually doing at satisfying its obligations. An effective way of measuring this performance is the current ratio. The current ratio is the current assets of the firm divided by the current liabilities of the firm. This ratio shows us a quick view of the firm's ability to satisfy its current obligations with its current assets. When the ratio is above 1, there is no cause for concern, but if it is below 1, it means that the firm could potentially have issues meeting its short-term obligations with its current assets.
As can be seen, AT&T has only had 3 quarters in the past 10 years in which they were financially healthy from a current ratio perspective. For the other 37 quarters however, AT&T has had nearly two times more current liabilities than current assets. This ratio is even more insightful in light of very low revenue growth rates. As revenues continue to flounder, the firm will continue to have a decreased current ratio since the firm is only able to retain very few of its earnings. This analysis is expanded in the following section.
Retention of Earnings
As if negligible revenue growth and a depressed current ratio aren't enough, AT&T has also had a catastrophic collapse in retained earnings. Retained earnings are the portion of earnings that the firm is able to invest back into itself at the end of the quarter. Historic retained earnings are shown in the below chart.
Since the sharp increase in 2010, the company has retained $23 billion less in earnings. This collapse represents nearly a 50% decrease in funds that the firm is investing back into its operations. This is significant in that it means that the firm is decreasing its ability to better itself in the future. When funds are retained rather than paid out as dividends, the firm is showing the market that it believes the best use of funds which would maximize shareholder value is investing right back into the organization. Due to the collapse in retained earnings, AT&T is demonstrating both that its earnings are collapsing and that it is no longer investing in itself at the levels it once deemed appropriate. To put the current levels of retained earnings in perspective, the retained earnings level has not been this low since 2003 - or when the stock price was 45% below current values. Does it make sense that a company which has decreased its internal investment to 10 year lows is progressively making new 52-week share-price highs?
The Big Picture
Rather than being caught up in the sensational headlines about AT&T, I believe that prudent investors should actually examine and seek to understand the fundamental picture of the company. Over the past four years, AT&T has not grown its revenue by even a moderate margin. A simple analysis of current assets and current liabilities shows that AT&T is vulnerable to short-term liability risk. Additionally, the firm is retaining less and less of its revenues each year. Despite all of this, the stock continues to make yearly highs. Why is this? I believe that it is pure investor speculation. Rather than examining the actual company, I feel that many are basing their decision making on what "could be" or the newest headlines of the organization. I believe that this simple analysis has shown that from a purely fundamental perspective that the organization is not growing, and the stock price is diverging from what is really happening within the company.
In order to best time my investments, I try to execute my fundamental beliefs technically. I have found that by basing my decisions in fundamental analysis and executing my trades using technical analysis, I am better able to time the market. This said, I have attached a historic weekly price chart of AT&T to show levels where I believe participation in this fundamental theory to be warranted. As can be seen, AT&T is in an undeniable uptrend which is progressively obtaining a steeper slope. Despite such a strong upward trend, I believe a reversal is in the making. Even if I am correct and prices do reverse in the near future, I do not see a reason to short until prices fall below $35 per share. Price traded around this point for the months of May and June and left a very clear retracement which, when violated, technically signals the end of the uptrend. Through this analysis, I have presented the fundamental argument for the decline in share price of AT&T; however, I suggest that we wait until prices fall below $35 before acting on this analysis. This will allow us to preserve precious capital in the event that the analysis is ill-timed or that prices continue their solid uptrend.