Is AT&T’s Stock a Buy as iPhone Sales Soar?

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With shares of AT&T (NYSE:T) now trading around $35, is the stock a BUY, a WAIT and SEE, or a STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock’s Movement:

Since AT&T’s stock hit a 52-week high on September 21, reaching $38.58 per share, the stock has fallen by more than 11 percent. Even the company’s third quarter earnings, which CEO Randall Stephenson termed a “strong performance” did not significantly alter this course. However, as of October 29, the company’s stock price has risen 20 percent in the past 12 months.

The company released its third quarter earnings report on October 24, showing solid earnings per share growth and gains in wireless revenue. For the three months ended in September, AT&T reported revenue of $31.4 billion, in line with the year-ago quarter, and earnings of $3.63 billion, or $0.63 per share. Comparatively, Wall Street analysts had expected the company to report revenue of $31.72 billion. Only stock buybacks, which grew to $3.8 billion for the quarter, allowed the company’s earnings to beat estimates while revenue missed.

AT&T, the nation’s second largest wireless carrier, experienced marked growth over the quarter; the company’s year-over-year wireless revenues rose 4.5% to $14.9 billion, its wireless data revenues rose 18.3 percent to $6.6 billion, and the company added 678,000 new subscribers.

Competition within the telecommunications industry is heavy, making the wireless carrier’s growth statistics of particular importance. Together AT&T and Verizon (NYSE:VZ), the largest carrier, control close to two-thirds of the wireless communications market, in what has been dubbed a duopoly. However, Verizon is the clear leader in both subscribers and 4G coverage; the company added 127 percent more new customers last quarter than AT&T and provides 4G service in 337 markets to AT&T’s 60 and Sprint Nextel’s (NYSE:S) 15. The company however is making efforts to expand its service; in early September the company announced that would extend its 4G network to 47 new markets by year’s end.

Furthermore, if Softbank’s (SFTBF.PK) proposed purchase of a 70 percent stake in Sprint is completed, the deal could bring even more competition to market.

AT&T’s third quarter results were aided by Apple’s (NASDAQ:AAPL) release of the iPhone 5 in mid-September. While subscriptions for the iPhone are increasing for Verizon, AT&T leads its competitors; the phone currently accounts for 70 percent of all AT&T’s smartphone sales. The company announced on October 25 that it had activated 4.7 million iPhones during the quarter, up from 3.7 million in the previous quarter.

T = Trends Support the Industry in which the Company Operates:

While in New York meeting with Sprint’s Chief Executive Officer David Hesse, Softbank President Masayoshi Son told Bloomberg, “You say the market is overly saturated. I think that’s totally wrong.” He believes that as mobile devices become more established in society, subscriptions will increase per capita. “Each subscriber should have at least two subscriptions: one for a smartphone, one for a tablet,” Son said. I would say in the near future three lines, four lines, five lines per capita is possible.”

AT&T’s results support this statement; for the last quarter, wireless data revenues increased 18.3% to $6.6 billion over the quarter as customers used tablet computers and other mobile internet applications more frequently.

Conclusion:

With the telecommunications sector seeing the third best growth in the S&P 500 this year, AT&T is well situated. Compared with its peers, the company has a favorable price to earnings ratio of just over 46, while Verizon’s is just under 41 and Sprint is not profitable. The company has continued to grow over the past few quarters both in terms of mobile market share and subscriptions.

However, while analysts appear generally optimistic about the company, Stifel Nicolaus and Hudson Square Research downgraded the stock from a Buy to a Hold in mid-September.

Based on the key metrics above, AT&T looks like a WAIT AND SEE in the short term. What do you think? Let us know in the comment section below.

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