ModernGraham Quarterly Valuation Of AT&T Inc.
Summary
- AT&T is suitable for the both the Defensive Investor and the Enterprising Investor following the ModernGraham approach.
- According to the ModernGraham valuation model, the company is overvalued at the present time.
- The market is implying 3.30% earnings growth over the next 7-10 years, which is above the company's actual growth in recent years.
AT&T Inc. (NYSE:T) is a company which has significantly lagged behind the market the last couple of years. Many investors may be intrigued by this development, with the thought that it must have been overlooked by the masses, but this alone cannot be the determinative factor in whether the company is a worthy investment. Benjamin Graham, the father of value investing, taught that the most important aspect to consider is whether the company is trading at a discount relative to its intrinsic value. It is through a thorough fundamental analysis that the investor is able to make a determination about a potential investment's merits. Here is a look at how AT&T Inc. fares in the ModernGraham valuation model.
The model is inspired by the teachings of Benjamin Graham, and considers numerous metrics intended to help the investor reduce risk levels. The first part of the analysis is to determine whether the company is suitable for the very conservative Defensive Investor or the less conservative Enterprising Investor, who is willing to spend a greater amount of time conducting further research.
In addition, Graham strongly suggested that investors avoid speculation in order to remove the subjective elements of emotion. This is best achieved by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company. By using the ModernGraham method one can review a company's historical accomplishments and determine an intrinsic value that can be compared across industries.
T data by YCharts
Defensive Investor - must pass at least 6 of the following 7 tests: Score = 6/7
- Adequate Size of Enterprise - market capitalization of at least $2 billion - PASS
- Sufficiently Strong Financial Condition - current ratio greater than 2 - FAIL
- Earnings Stability - positive earnings per share for at least 10 straight years - PASS
- Dividend Record - has paid a dividend for at least 10 straight years - PASS
- Earnings Growth - earnings per share has increased by at least 1/3 over the last 10 years using 3-year averages at beginning and end of period - PASS
- Moderate PEmg (price over normalized earnings) ratio - PEmg is less than 20 - PASS
- Moderate Price to Assets - PB ratio is less than 2.5 or PB x PEmg is less than 50 - PASS
Enterprising Investor - must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 2/5
- Sufficiently Strong Financial Condition, Part 1 - current ratio greater than 1.5 - FAIL
- Sufficiently Strong Financial Condition, Part 2 - Debt to Net Current Assets ratio less than 1.1 - FAIL
- Earnings Stability - positive earnings per share for at least 5 years - PASS
- Dividend Record - currently pays a dividend - PASS
- Earnings growth - EPSmg greater than 5 years ago - FAIL
Valuation Summary
Key Data:
| Recent Price | $34.83 |
| MG Value | $14.72 |
| MG Opinion | Overvalued |
| Value Based on 3% Growth | $33.43 |
| Value Based on 0% Growth | $19.60 |
| Market Implied Growth Rate | 3.30% |
| Net Current Asset Value (NCAV) | -$2.05 |
| PEmg | 15.11 |
| Current Ratio | 0.76 |
| PB Ratio | 1.97 |
Balance Sheet - June 2014
| Current Assets | $33,112,000,000 |
| Current Liabilities | $43,788,000,000 |
| Total Debt | $73,570,000,000 |
| Total Assets | $293,466,000,000 |
| Intangible Assets | $136,129,000,000 |
| Total Liabilities | $201,334,000,000 |
| Outstanding Shares | 5,220,000,000 |
Earnings Per Share
| 2014 (estimate) | $2.52 |
| 2013 | $3.39 |
| 2012 | $1.25 |
| 2011 | $0.66 |
| 2010 | $3.35 |
| 2009 | $2.05 |
| 2008 | $2.16 |
| 2007 | $1.94 |
| 2006 | $1.89 |
| 2005 | $1.42 |
| 2004 | $1.77 |
Earnings Per Share - ModernGraham
| 2014 (estimate) | $2.31 |
| 2013 | $2.18 |
| 2012 | $1.68 |
| 2011 | $1.94 |
| 2010 | $2.48 |
| 2009 | $1.99 |
Dividend History
T Dividend data by YCharts
Conclusion:
After looking over the company's fundamentals, AT&T qualifies for the Defensive Investor as the only concern at this time is the low current ratio. The Enterprising Investor has many other concerns but is willing to overlook them as it passes the more conservative Defensive Investor requirements. As a result, all value investors should feel very comfortable proceeding to the next part of the analysis, which is a determination of the company's intrinsic value.
Estimating the intrinsic value requires examining the company's earnings history. AT&T has seen its EPSmg (normalized earnings) drop from $2.48 in 2010 to only an estimated $2.31 for 2014. This demonstrated drop in earnings does not support the market's implied estimate of 3.3% earnings growth. In recent years, the company has actually seen an average annual drop in earnings of around 1.4%. Clearly, there would have to see a significant change in its level of growth in order to meet the market's estimated growth level. As a result, the ModernGraham valuation model returns an estimate of intrinsic value below the market price at this time, and the company appears to be overvalued by the market.
Be sure to check out previous ModernGraham valuations of AT&T Inc. for better perspective.
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