AT&T (NYSE:T) has released its second quarter results announcing revenues of $61.6 billion and operating income of $12.5 billion for the first half of the year. This result was dominated by strong growth in wireless revenues (up 15.8% in the second quarter) and speculation on the impact of the 3G iPhone on AT&T’s third quarter numbers.
AT&T’s current price of $30.17 is at the bottom of the stock's 12 month range ($29.72 to $42.97) so we decided to apply our discounted cash flow valuation tool to AT&T. Utilising analyst projections, AT&T’s MD&A and our own analysis we arrive at a valuation of $39.25 for AT&T, a 30% discount to the current share price.
Supporting points for buying AT&T at $30 per share:
- 18 of the 28 analysts aggregated by Yahoo Finance rate AT&T a buy or strong buy.
- Analysts' mean target price for AT&T is $41.31, a 37% premium to the current share price.
- A P/E ratio (ttm) of 13.40 at the lower end of the 5 year range (10.50 - 22.10).
- AT&T’s exclusive iPhone partnership with Apple and the recently released 3G iPhone selling at twice the rate of the original iPhone.
- The impact of AT&T’s estimated iPhone subsidy of $300 per device on revenues and margins.
- AT&T’s strong wireless growth is offset by declining voice revenues (down 7.8% or $1.6 billion in the six months to 30 June 2008).
- What are AT&T’s long-term growth prospects beyond the Apple iPhone deal?
Despite these downside risks AT&T looks attractive at a $30 share price the question is whether the market will recognise the discount AT&T appears to be trading at.
Stock position: None.