Is AT&T Inc. (T) A Buy At Current Levels?

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AT&T Inc. (NYSE:T) shares are currently trading near their one-year high. That raises a question whether the investors should still enter the counter at the current levels. Unlike the year 2014, the company managed to post strong results last year. On top of it, the acquisition of DIRECTV (NASDAQ:DTV) will also help to consolidate and enhance its position. On ten financial parameters, the company is strong in at least seven of them compared to the industry average while two parameters remain in line with the average. Only one parameter that is, the return on equity for the trailing twelve-month period is slightly lower than the industry. Its yield on the dividend is also strong at 5% making the stock worth buying on dividend parameter alone. Let’s also look into other aspects and see where the stock is placed.

Bounce Back Seen In Wireless Division

One of the strong points for AT&T Inc. (NYSE:T) is that it was able to bounce back strongly in its wireless division last year after being at the receiving end of the preceding year. In 2014, the company had to suffer a drop in free cash flow and earnings significantly. That was mainly because the company had to respond to the rivals pricing pressures. As a result, the telecom service provider launched AT&T Next plan. It was but natural that the revenue generation was hurt in the early stages and caused pressures on wireless margins too. The saving point was that its costs did not raise and remained same. That could have been termed as a blessing in disguise.

AT&T Inc. (NYSE:T) should be given due credit to ensure that more than three-fourth of smartphone sales were based on its Next plans. The advantage of such thing was that there was no need to pay up the cost of device subsidies and that it resulted in considerable savings in operational expenditures. As a result, operating income jumped 15% in the wireless division last year, and it turned out to be a tailwind from a headwind. Also, the acquisition of DIRECTV (NASDAQ:DTV) has helped to generate free cash flow in 2015. There is every reason to believe that the company will continue to face the favorable trend in the current year too.

DTV To Add Value

As AT&T Inc. (NYSE:T) addressed the issue of generating sufficient free cash flow from the wireless divisions, the company also stands to gain from DIRECTV (NASDAQ:DTV) on several metrics. One of them is the addition of assets to its fold, and the savings are expected to be reflected in the current year’s performance. That included cost cutting, as well as, renegotiating programming contracts. The interesting point is that the telecom service provider could project a healthy FCF of $17 billion for the current year. That represented 12% growth from the last year levels. Also, its FCF per share should reach $2.75 from $2.44 in 2015 with 25 cents a share coming from DTV assets alone.

Recently on April 11, AT&T Inc. (NYSE:T) started providing additional value to its customers with DTV in its fold. As part of it, the telecom service provider is guaranteeing prices for two-year for its new DIRECTV home Internet, as well as, digital home phone customers. The company also unveiled $50 a month package of DIRECTV SELECT. The customers could save over 40% on a triple play with the launch of the fresh plans to attract customers. Though this will put some pressures on margins, the fact is that it applies to new customers and that the merged entity could withstand such pressures. On the other hand, it will provide an opportunity to add more subscribers.

Global Presence

AT&T Inc. (NYSE:T) is also aware that it needs to expand globally to satisfy the investors, who bet on the stock for long-term gains. For that purpose, the company acquired Iusacell and Nextel Mexico last year to support its DIRECTV (NASDAQ:DTV)’s global operations. The company’s top-line revenue provided strong hopes of delivering better results in the current year though it was not an impressive one in the fourth quarter. The telecom service provider is creating a solid base for its global operations. There were indications that the telecom firm was exceeding some of its internal targets currently. Most recently, it revealed that it could make significant strides in extending its global operations as it could add one million 4G customers in Mexico in the March quarter.

Connected Devices To Play Key Role

The next bust is connected devices that AT&T Inc. (NYSE:T) is counting upon. Therefore, the focus on Internet of Things (IoT) will help the company to add more and more connected devices to its network in the current year. The telecom firm is already ahead of its rivals in adding connected devices last year when it said that it has more than 26 million devices linked to its network. Its deal with Ford Motor Company (NYSE:F) will have the potential to add a minimum of ten million cars in the next five-year period.

Valuation

Currently, AT&T Inc. (NYSE:T) enjoys PE of 16.3 times for the trailing twelve months (TTM) period, which is lower than the industry average of 19.2 times. While its price to book is 1.9 times versus 2.0 times of the industry average, its price to sales is in line with the industry average of 1.5 times. Significantly, the company achieved 4.8% average revenue growth for the three-year period whereas the industry average was minus 5.2%. Its profit also recorded 22.5% growth versus 6.5% uptick achieved by the industry. Its net margin was also ahead at 9.1%. The return on assets and equity was 3.8% and 12.8% compared to the industry average of 3.6% and 13.6% respectively. There is scope for further upside rewards.

Conclusion

AT&T Inc. (NYSE:T) enjoys a lower PE than the industry average. Its forward PE is still more attractive at 12.88 times. There is potential for the stock to move upside. Its first quarter results will provide further direction to its stock performance.

Disclaimer: The opinions and data expressed herein by the author are not an investment recommendation and are not meant to be relied upon in investment decisions. The author is not acting in an investment advisory capacity, nor is this an investment research report. The author’s opinions expressed herein address only select aspects of potential investment in securities of the company or companies mentioned and cannot be a substitute for comprehensive investment analysis. Any analysis presented herein is illustrative in nature, limited in scope, based on an incomplete set of information, and has limitations to its accuracy. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies’ SEC filings, and consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author’s best judgment as of the date of publication, and are subject to change without notice.

Viraj Shah

Viraj Shah has completed M.Com (Finance) and is currently pursuing his CFP. He tracks US markets along with other global markets like India very closely. He is very passionate about stocks, real estate, and technology. He also believes that money can always be made in the market.

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