Seeking Alpha

PGrim's  Instablog

PGrim
Send Message
MS.Fin - Summa Cum Laude - University of Texas at Dallas BS.Fin - Summa Cum Laude - University of Texas at Dallas
  • AT&T Strategic Analysis 0 comments
    Aug 29, 2012 9:10 AM | about stocks: T, VZ, DTEGF, S

    AT&T Executive Summary

    AT&T provides telecommunication services to consumers, businesses and other entities. More specifically AT&T is classified as a diversified telecommunication services. AT&T has been around since 1876, when Alexander Graham Bell invented the telephone. (http://www.att.com/gen/investor-relations?pid=5711). Headquartered in Dallas, TX, AT&T is the largest landline and wireless service providers in America. They also provide Uverse, which is ultra-high speed internet and interactive high definition cable TV service. AT&T also provides wireless phone and data service, primarily to American customers, in over 200 countries. (http://www.att.com/gen/investor-relations?pid=5711). AT&T is a leader in the diversified telecommunications services industry and has an internal strategy to sustain its competitive advantage.

    AT&T 2007-2011 Financial Analysis

    AT&T's Financial Statement Analysis will begin with 2007 and end with the most recent available annual statement, 2011. This analysis will begin just before the start of the Financial Crisis and give a good indication of just how strong AT&T's business model and industry faired since then. This financial analysis will evaluate AT&T's balance sheet, income statement and cash flow statement, as well as some key metrics between AT&T and its three main competitors Verizon Communications, Sprint Nextel and T-Mobile, which is a subsidiary of Deutsche Telekom.

    Beginning with AT&T's balance sheet, we see that total assets decreased from 2007-2011 (-1.95%), total liabilities increased 2.66% and stockholders equity decreased (-9.32%). This is not a huge change, especially over five years. In actuality, considering the financial climate of the current economy, this is not a startling change. The current ratio of AT&T is .75, this ratio does need to increase to at minimum "1", and this is much lower than its competitors Verizon, Sprint and T-Mobile at 1.01, 1.59 and .65 respectively. What the current ratio is indicating is that for every $1 of AT&T's liabilities there is only .75 cents worth of assets. While general indebtedness is typical of some industries, it is atypical of the diversified telecommunication services industry. Only AT&T and T-Mobile have current ratios below "1", although it appears Sprint is very close to this as well. One thing AT&T must work on is fixing its balance sheet problem by lowering some of its liabilities and increasing some of its assets. For the most part though, AT&T's balance sheet is in a fairly healthy state and as long as it keeps a leash on its leverage, it will continue to stay healthy.

    Second is AT&T's income statement, this will be a little more important and a little more telling into AT&T's future and the industry it competes in. Between the 2007-2011 periods, AT&T grew its sales 6.55%, from a 2007 level of $118,928 million to a 2011 level of $126,723 million; this is a healthy growth rate for a company that is in such a saturated market. Although Verizon is growing at a brisker pace at 18.62% with a smaller total amount of a 2007 level of $93,469 million to a 2011 level of $110,875 million. Sprint is certainly lagging the top two competitors with a 2007-2011 decrease of (-16.11%) which dropped from a 2007 level of $40,146 million to a 2011 level of $33,679 million. T-Mobile is certainly lagging the top two competitors as well, with a 2007-2011 decrease of (-16.90%) which dropped from a 2007 level of $93,694 million to a 2011 level of $77,857 million. AT&T's net income had a (-67%) loss between 2007-2011, while taken at face value this is sounds like a troubling situation but it is an anomaly. Closer look tells that from 2007-2010 AT&T actually increased its net income 66.21% from $11,951 million to $19,684 million respectively. The last quarter of 2011 was an unusual one for AT&T, they saw their total revenue increase along with an even more substantial cost of goods increase, this was compounded by a more than doubled than the quarterly average of sales, general and administration expenses increase an one-time unusual expense to bring their net income to a loss of ($-6,678) million. The majority of this troubling quarter can be attributed to the failed merger of AT&T and T-Mobile. Due to unexpected government intervention the AT&T and T-Mobile merger was prohibited, so AT&T was forced to take a one-time $4 billion loss, in which it paid to T-Mobile in the form of cash and wireless spectrum. (http://www.nytimes.com/2012/01/27/technology/atts-net-loss-tied-to-t-mobile-merger-fees.html & http://dealbook.nytimes.com/2011/12/19/att-withdraws-39-bid-for-t-mobile/). Outside of that one quarter AT&T has continued to do well and show its dominance in its industry and exhibit a healthy income statement with consistent sales and growth.

    Next AT&T's cash flow statement will be analyzed. For 2011, AT&T's operating activities, investing activities and financing activities net cash flow is $34,648, (-$21,250) and (-$11,650) million respectively. These numbers have not fluctuated much at all and have been fairly stable since 2007, this is indicative of a company with a plan in place and sound execution. The inflow of cash due to operating activity and outflow of cash due to the investing and financing activity is representative of a healthy company that is generating cash from its operating activities and reinvesting it in growing the company through its investing and financing activities. AT&T's cash flow statement shows it's in a good position and has been since 2007.

    Finally, some key metrics between AT&T, Verizon, Sprint, T-Mobile and the telecommunications industry will be analyzed. The first ratio is a long term solvency ratio; it is the Debt-to-Equity ratio. This ratio describes the financial leverage of the company and how aggressive the company has been financing its growth with debt, the lower the better. AT&T, Verizon, Sprint and T-Mobile have a 61.27%, 143%, 165% and 133% respectively. The winner is obvious; you can see that AT&T is not nearly as indebted as the other companies. Our next metric we will take a look at is Receivables Turnover; this ratio tells how quickly the company collects its debts from clients, generally a higher number is better. AT&T, Verizon, Sprint and T-Mobile have a 9.47, 9.71, 10.86 and 9.28 respectively. These turnover ratios are very close together, and are typical of this industry. This next ratio is very telling; it is Profit Margin, the higher the better. This ratio can tell what company is performing better and controlling its expenses and maximizing every dollar earned. AT&T, Verizon, Sprint and T-Mobile have a 3.24%, 2.36%, -9.72% and 0.45% respectively. AT&T is the winner again, Verizon is close behind and T-Mobile is barely positive while Sprint is just hemorrhaging money. The last key metric we will take a look at will be more directed at the investors, this is a Price to Earnings Ratio. The P/E ratio is basically how much investors are willing to pay for one dollar of earnings; the higher the P/E the more investors are paying to own the earnings of the company. AT&T, Verizon, Sprint and T-Mobile have a 50.62, 46.55, N/A and 111.96 respectively. Sprint does not have a P/E ratio due to extremely poor performance, T-Mobile's does not seem to consistent because this is actually Deutsche Telekom's P/E ratio, so it may be inaccurate due to foreign currency exchange and other subsidiaries outside the United States, it appears that AT&T has a little higher P/E ratio and that investors think a little more highly of AT&T over Verizon.

    To recap the financial statement analysis, AT&T is in very good financial health if not the best of the entire Telecommunications Industry. It is imperative for a company to be in good financial health before it can compete and be competitive in the market.

    AT&T External Analysis

    AT&T has built up its empire and survived competitively for over 100 years. AT&T is arguably in one of the best positions it has ever been due to its current external environment. America is growing and we are on the forefront of technology, this means faster data speeds and more bandwidth. Luckily AT&T is in the process of building out its Uverse network which is comprised entirely of fiber optics; fiber optics carries data at the speed of light. Americans are also becoming more mobile as are the devices we carry; AT&T has one of the largest Wi-Fi hotspot networks in America to support this growing trend. AT&T and the entire telecommunications industry has recent come under fire from consumers for clogged wireless networks, there is too many wireless users accessing data on their mobile devices at once, such as smart phones and laptops. While AT&T and the telecommunications industry have the capability to build out their network, they cannot due to government regulation of the wireless spectrum that the mobile devices operate on and this is actually one main weakness for AT&T and all the wireless service providers.

    The telecommunications industry is controlled by four major players: AT&T, Verizon, Sprint and T-Mobile, and their wireless subscribers are: 103.9, 93, 56.1 and 33.6 million respectively. To break this industry down even more, you see that it is essentially a duopoly; the financials and market share are very similar between AT&T and Verizon. T-Mobile and Sprint are really not a threat to these two companies, they have small market share and Sprint is hemorrhaging money just to survive in the industry while T-Mobile continues to lose customers. Verizon, like AT&T, is building out its network to the new 4G LTE (Long Term Evolution), and while AT&T has a larger, more expansive network, Verizon's is a bit faster. Verizon operates on a CDMA network, which uses ESN's (electronic serial numbers) making it less attractive to switch between mobile devices and this network is primarily utilized only in America. AT&T s' utilizes the GSM network which uses SIM cards; this not only makes mobile devices much easier to switch between but it also is the same cellular network the rest of the world uses.

    The rivalry among AT&T and its competitors is easily some of the most cut throat of any industry. The telecommunications industry is saturated, virtually every American has a cell phone all the way down to 6 and 7 year olds; the only customers these companies are attracting are customers who are with a different carrier. There have already been a few mergers and acquisitions of carriers, AT&T was once Cingular back in 2004, Sprint acquired Nextel in 2005, Verizon acquired Alltel in 2009 and AT&T's failed attempt to acquire T-Mobile in 2011. (http://en.wikipedia.org/wiki/AT%26T_Wireless_Services) & (http://en.wikipedia.org/wiki/Sprint_Nextel). It's apparent that rivalry between existing firms is extremely intense.

    The bargaining power of suppliers for AT&T is extremely low. AT&T supplies its own data and builds out its own networks. It does require some cooperation from the phone companies to sell its phones but AT&T has the upper hand in these business negotiations due to its extensive customer base. But to carry the iPhone, AT&T does pay Apple a generous percentage of its revenue from iPhone customers data plans.

    The bargaining power of buyers for AT&T is moderate. On one hand you have customers that do sign two year contracts and if they decide to break that contract there are going to be exorbitant fees per phone for the cancellation. But on the other hand, when customers are out of contract they can demand free phones, lower and special rates, free minutes all for signing another two year contract with AT&T. As you can see it really depends what part of the spectrum the buyer is on at that moment in time to determine the bargaining power they have.

    The threat of new entrants for AT&T is extremely low. This threat is extremely low because: high capital requirements, government regulations, building up a brand name, patents, geographical location, technology and building relationships with phone handset manufacturers and customers; this list can go on and on. AT&T does not need to worry about new firms entering this market.

    The threat of substitute products and services is fairly high for AT&T. For the most part all four competitors offer the same fundamental services, which are talking, texting and web surfing. What does help limit this force is the somewhat high switching cost of breaking a contract, activation fee, limited number of competitors, and that two of the three competitors have inferior service compared to AT&T and its network. This is one of the most important forces AT&T needs to keep a watchful eye on to maintain its competitive advantage.

    AT&T has done a great job leveraging its core competencies of providing wireless services to its customers. All of their key businesses exhibit synergistic and complimentary services and products and can easily be bundled together or sold separately. They also don't need an extremely wide range of technicians to service or maintain their networks due to the interconnectedness of all of them. One predominate trend in the wireless industry is smartphone usage, this usage puts a much heavier burden on the networks and currently this trend appears not to be fading. While this trend really benefits consumers and the wireless companies it does have its down sides, the data usage by consumers coupled with the faster more accessible smartphones coming out will just add to the stress and clogging of wireless networks in its current state.

    AT&T Internal Analysis

    AT&T's strengths appear to outweigh their weaknesses. Some of their strengths tend to be complementary and exhibit synergy to each other such as their networks, wireless and wire line. Both of these can be solicited to consumers as well as businesses. These products they offer are the crux to many small to large businesses doing business in this day and age. These products can also cater to consumers having a need for wireless phones and internet. Another strength for AT&T is that their products are not tangible; they sell services such as minutes for cell phones, bandwidth for internet and accessibility to data hot spots around the United States. This means that AT&T does not have many holding or inventory costs relative to a manufacturing or physical goods company. AT&T can also manipulate its packages to be more marketable to businesses and consumers without hardly any extra costs. This is a great strength to help adapt to an ever evolving market. AT&T's does make smart investments, they have a strong c-level management team in place and the numbers reflect it; over the past 5 year AT&T's ROI is 7.23%, more than double its closest competitor Verizon at 3.26%.

    AT&T does have a few weaknesses like any other company. One weakness is its older residential landline service, it is not bringing in the same revenue it once was due to its strength in the wireless industry. This is a drain on AT&T's Income Statement, although the strength of the wireless industry far outweighs the drain of the landline service. Another weakness of AT&T is a ratio of their Balance Sheet, which suggests they are over leveraged. AT&T's current ratio is below "1" which indicates that they have more current liabilities then current assets. Another weakness AT&T is faced with is how saturated the industry is. Any new customers AT&T gathers is going to have to be done by taking them from another carrier. This makes it harder to get new customers and the industry becomes extremely competitive. One key weakness that AT&T is facing is government regulation on the wireless spectrum that it can use to provide wireless service to its customers. The government is not allowing any new frequencies to be used and this leads to clogging of cell sites which leads to dropped calls, slow data speeds and poor/spotty connections. We all know that this is thorn in the side of AT&T and its customers, but is unfortunately the cost of doing business in a regulated industry. One last and main weakness for AT&T is its customer satisfaction in retaining loyal customers. In a fairly recent Consumer Reports survey, customers ranked Verizon #1 and AT&T last place. (http://www.technewsworld.com/story/68793.html?wlc=1259809979) AT&T undoubtedly has to work on their customer satisfaction.

    AT&T's Strategies vs. Competitors' Strategies

    AT&T's strategy is "bringing it all together for our customers, from revolutionary smartphones to next-generation TV services and sophisticated solutions for multi-national businesses." (http://www.att.com/gen/investor-relations?pid=5711). AT&T is a horizontally diversified, related businesses company. Their complementary products are sold between consumers and small to large businesses which include wireless telephone service, landlines and internet/data services. AT&T wants to differentiate itself from its competitors though superior, reliable and cutting edge technological service. They don't aim to be the lowest cost, but they do like to market low costs. This is in comparison to a company such as metropcs which is extremely low cost no contract service but limits customers to just that, a metro area, as well as old networks and old phones.

     

     

     

    Strategy Highlights

    Rationale

    Pros

    Cons

    AT&T

    Differentiation, Somewhat Cost leadership, Superior Service, Reliable Service, Fastest Service

    Consumers will pay the extra dollar for the superior service, they want the best

    More money coming into the company, best service provider out there, not terribly more expensive then cheap service

    More expensive, not everyone can afford the service, more service then just basic needs

    Verizon

    Differentiation, Very similar to AT&T and closest competitor, superior service, focuses on the fastest network

    Attracts the best customers who want the best service

    Fastest service

    More expensive, not everyone can afford the service, more service then just basic needs

    Sprint

    Cost leader, unlimited data and phone plans for a flat rate

    Consumers know exactly what they are paying for, don't have to worry about overages

    Not many complaints on overages or extra charges, can forecast future revenue more easily

    Attracts a "lower class consumer", not as much money to build out infrastructure or networks

    T-Mobile

    Cost leader, tiptoeing around no contract plans as well as fast service, somewhat confused

    Believe they can attract consumers of all backgrounds

    Helps attract consumers from all backgrounds, wide range of consumers

    Confused, can't focus on one specific strategy to help consumers

    Value Chain Analysis

    AT&T's value chain omits some of the traditional activities and operations that a traditional manufacturing company would have. Yet the activities that they do utilize in their value chain are what sets them apart and give them the competitive advantage to stay ahead in their industry.

    Primary Activities

    · Inbound Logistics - AT&T does not have the traditional inbound logistics for transporting raw goods. The most they have in this area would be shipping phones to their stores to be sold via UPS.

    · Operations - AT&T does have a bit more of this in the form of delivering wireless service to customers and maintaining their towers. In this part of the process they helped design the fast 4G network out today.

    · Outbound Logistics - This takes a different form for their industry but consists of strategically placing cell towers around cities and states to deliver the most wide spread and fastest network possible.

    · Marketing and Sales - This is the main point in AT&T's whole strategy, it is where the customers are taken from other carriers and where AT&T spends a lot of its money on advertising. The used this to their advantage when they rolled out the first iPhone that propelled them to the biggest wireless carrier. This is the activity that AT&T performs superior to other companies. They leverage their existing clientele and brand name to acquire customers.

    · Service - This is also another big segment for AT&T. Not only do the need to keep up their wireless network, the also have to provide service updates for customers phones, as well as physically servicing customers phones in the store that are broken or otherwise not working. This is certainly a weakness for AT&T and many other wireless carriers for that matter, the phone is such a personal gadget for people that they express this passion to the phone companies when it's not working correctly.

    Support Activities

    · Firm Infrastructure - AT&T has quite a good management in place that has continually increased earnings for the company and boasts one of the highest paying dividends in the telecommunications industry as well as the broad stock market in general. They are helping cut costs but outsourcing some of their non-face to face services with customers such as IT support, remote assistance and some computer customer service support. This has been a little detrimental to their customer satisfaction.

    · HR Management - AT&T human resources has a never ending job on hand with all the 256,000 employees they keep on pay roll (http://eresearch.fidelity.com/eresearch/goto/evaluate/snapshot.jhtml?symbols=T&rsrch=gqb)

    · Technology Department - AT&T really takes the reins on this one with their ground breaking R&D department helping create one of the fastest and broadest networks in America

    · Procurement - AT&T has great relationships with wireless equipment makers such as Qualcomm and other companies that help create their cell sites and phone receivers.

    Recommendation

    Based on financial analysis, internal & external analysis and value chain analysis AT&T has an opportunity to really succeed in sustaining and setting itself apart from Verizon as the number one company in wireless communication. Listed below are three key recommendations that will allow AT&T to capitalize on their current strategic position as a Diversified and Cost Leader corporation:

    1- Increase customer loyalty and retention rate. In order for AT&T to continue as #1 in the wireless business and continue to generate profits, they must find a way to make customers happy. It's a simple formula, customer satisfaction leads to happy loyal customers who lead to profits for the company and its shareholders.

    2 - Increase the wireless spectrum available to customers. Due to the birth of the smartphone and iPhone and how easily available they are to the current consumer to bring up this webpage or download this song, there has been an explosion in data usage on the wireless networks. This excess usage has caused congested networks. In order for AT&T to successfully serve its customer base, they must increase bandwidth and wireless network capacity for its customers through lobbying, government deregulation and/or technological innovation.

    3- Increase financial position of Current Ratio and Year over Year Sales Growth. AT&T really is losing in these battles versus the rest of the wireless industry. They are the only company with a current ratio below "1", they need to find a way to cut some of their costs and increase their assets. Now this low current ration could be attributed to the one-time charge off of $4 billion due to the failed AT&T and T-Mobile merger. Another area for improvement is their year over year sales growth, while AT&T's gross sales is more than Verizon, their growth year over year is lagging at a 6.55% to Verizon's 18.62%. AT&T needs to create a desire for customers to spend more money with them.

    These are the key points that if strategically implemented, will allow AT&T to secure its lead as the #1 wireless carrier. The key here is to choose the correct one, because one of these recommendations, if implemented correctly, will naturally and synergistically flow into self-implementation of the other two recommendations. In the long run, that correct plan to implement will be recommendation #2, increase the wireless spectrum available to customers. Because if AT&T can build out a superior network with no disruptions, the rest will fall into place, customers will be happier and have less to complain about. They will feel like they made the right choice and are happy to spend their money with AT&T because it is money well spent.

    Strategic Acquisition of T-Mobile Evaluation - AT&T mad a very bold move in an already very limited competitive industry when it attempted to acquire T-Mobile, the 3rd largest wireless company in America. While this was a great strategic move and would have really put AT&T far ahead of its main competitor, Verizon, it was ill timed. This is due to our current economic and political climate, the government wants to control the "free market" and "protect the consumer" and this was one of their ways of doing it. While AT&T did lose a good amount of assets it hardly bankrupt the company. To maximize the potential of government approval, AT&T should have waited for an arbitrage opportunity. They could have executed the acquisition through two possible opportunities, 1) buying T-Mobile stock when it was undervalued, and/or 2) allowed T-Mobile to continue its decline until it needed to be saved and AT&T could have scooped them right up at a fire sale price. While it was unfortunate that this acquisition failed it shows that AT&T does have a good, aggressive management team behind the scenes that is willing and ready to take the company to the next level.

    Disclosure: I am long T.

    Stocks: T, VZ, DTEGF, S
Back To PGrim's Instablog HomePage »

Instablogs are blogs which are instantly set up and networked within the Seeking Alpha community. Instablog posts are not selected, edited or screened by Seeking Alpha editors, in contrast to contributors' articles.

Comments (0)
Track new comments
Be the first to comment
Full index of posts »
Latest Followers
Instablogs are Seeking Alpha's free blogging platform customized for finance, with instant set up and exposure to millions of readers interested in the financial markets. Publish your own instablog in minutes.