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AT&T (NYSE:T) added a net 151,000 new customers on contract-based plans from July through September, the lowest number for that period since at least 2003. The company blamed short supplies of the iPhone 5 for the disappointing customer growth number. However, Verizon (NYSE:VZ) added 10 times as many contract-signing customers as AT&T did.

Only 18 percent of the 4.7 million iPhones activated went to new subscribers, the lowest number yet. AT&T implied it suffered in comparison to Verizon because it launched its new data-sharing plans later in the quarter. However, AT&T activated 1.3 million iPhone 5s last quarter, double Verizon's totals.

The iPhone has an industry-high subsidy of about $400 per iPhone and tends to decimate carriers' profit margins, particularly when new iPhones launch. AT&T's third-quarter wireless profit margin fell to 40.8 percent from 45 percent in the second quarter and 43.7 percent a year ago.

Sanford Bernstein analyst Craig Moffett believes AT&T's and Verizon's growth will slow. AT&T is modifying its strategy to expand services to customers in an attempt to get customers to spend more money and help maintain the company's growth rate.

AT&T's wireline business, which makes up nearly half of revenue, continued to shrink slowly, as people cancel their landlines and move from phone-line broadband to cable modems. The change in consumer preferences is a major risk to AT&T's valuation. It remains to be seen how many of the customers switching from landlines will maintain AT&T as their service provider.

AT&T's quarterly results were largely flat compared with a year ago. Net income was $3.64 billion, or 63 cents per share, nearly unchanged from the $3.62 billion, or 61 cents per share, a year earlier. Revenue was also essentially flat from last year, at $31.46 billion. When subtracting the phone book business from last year's results, AT&T's earnings rose about 2 percent in the last quarter, as customers kept shifting from regular phones to smartphones with more expensive service plans. Revenue grew by nearly 3 percent.

The firm posted record cash from operations of $11.5 billion and record free cash flow of $6.5 billion in the third quarter; full-year free cash flow guidance increases $2 billion to $18 billion or higher. AT&T repurchased $3.8 billion in stock buybacks in the third quarter, 101 million shares repurchased.

AT&T's third-quarter capital spending was $4.9 billion, down 7.5 percent from $5.3 billion a year earlier. The company now expects spending to be at the low end of its previous forecast of $19 billion to $20 billion.

AT&T's Operating Segments

Wireless service revenue in the third quarter increased to $14.9 billion from $14.8 billion in the second quarter and $14.3 billion in the year-ago quarter. Wireless service revenue is trending higher.

Data revenue increased to $8 billion in the third quarter from $7.9 billion in the second quarter. Revenue was $7.6 billion in the year-ago quarter. Data revenue is trending higher.

Voice revenue is trending lower. Revenue was $5.57 billion in the third quarter a decline from $5.7 billion in the second quarter. Revenue was $6.2 billion in the year-ago quarter.

Overall, the trend in operating segment revenue is positive. Gains in data and wireless are offsetting declines in voice.

Valuation

The short-term valuations are off of their recent peak. That said, the absolute level of the valuations suggests the firm is fairly valued to overvalued. The multiplier model price-sales ratio is 1.59, price-earnings is 46.67, and forward price-earnings is 13.51. Price-cash is 93.87.

Recent Economic Data Points

French flash manufacturing PMI increased from 42.7 to 43.5 while the services PMI increased from 45.0 to 46.2. German flash manufacturing PMI declined from 47.4 to 45.7 while the services PMI declined from 49.7 to 49.3. The euro-area manufacturing PMI declined from 46.1 to 45.3 and the services PMI increased from 46.1 to 46.2. The euro-area economic activity continues to contract. Overall, the euro-area economic conditions didn't get much worse.

New home sales increased to an annualized pace of 389,000 from a revised 368k the prior reading. We are seeing continued signs of improvement in the housing market.

Crude oil inventories increased 5.9 million barrels. Crude oil inventories are above the average for this time a year.

Conclusion

AT&T's share price is trending lower. The operating segment financial performance is good and so was the third-quarter financial performance. The short-term multiplier model valuations are off of their peak, however, the share price could decline further as the slowdown in Europe and peaking economic data in the U.S. weighs on the premium investors are willing to pay for shares of AT&T. Investors should have already reduced their long equity exposure and traders shouldn't look to short sell shares of AT&T.

Disclaimer: This article is not meant to establish or continue an investment advisory relationship. Before investing, readers should consult their financial advisor. Christopher Grosvenor does not know your financial situation and ability to bear risk and thus his opinions may not be suitable for all investors.

Source: AT&T's Q3 Financial Performance