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AT&T Inc. (T): Was It Unfairly Punished by the Market?

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AT&T Inc. (NYSE:T)After recently reporting less-than-stellar revenue – down nearly 1.5% year-over-year – the sell-off in shares of AT&T Inc. (NYSE:T)  began. The company also experienced some negative downgrades as well.  AT&T Inc. (NYSE:T) also looks less than exceptional next to its rival Verizon Communications Inc. (NYSE:VZ), which seems to be the more popular telecom company at the moment. So is there reason for AT&T to worry?

Earnings and revenue…

While revenue was down, earnings were not. AT&T Inc. (NYSE:T) managed to increase earnings slightly by around 8.5%– meeting expectations. Revenue in its wireless business also rose, which is good for the long term as the company’s declining land-line business isn’t anything to get excited about for the future.

The company also added a little over a million new smartphone subscribers (now accounting for 72% of postpaid subscribers). Another positive takeaway was increasing wireless margins (always a good sign), but these don’t look as nice when set side-by-side with Verizon, which saw record wireless margins of more than 30% when it last reported.

In fact, Verizon seems to be beating AT&T Inc. (NYSE:T) at everything, especially after adding more customers and selling more smartphones than AT&T in Q1. After adding an impressive net 677,000 new-contract customers, Verizon Communications Inc. (NYSE:VZ) looks like it’s stomping all over AT&T– which added only 296,000 comparable customers in the same period. While Q1 is traditionally weak for these duopolistic carriers, this weaknesses can’t really be used as a defense for AT&T Inc. (NYSE:T) when its main rival is doing not only fine– but even good.

So maybe AT&T deserves all the negatives being hurled its way, but lets dig a little deeper before giving up on the company.

Valuations: horrible near term, much better looking long term…

P/E (ttm) Dividend (yield) Payout ratio
T 28.6 $1.80 (4.9%) 135%
VZ 134.4 $2.06 (3.8%) 508%

Data acquired from  Yahoo! Inc. (NASDAQ:YHOO) Finance on April 28

At first glance, both telecommunications companies look like screaming sells. Just looking at these numbers without further research, it appears that both companies may have to cut their dividends and are ready for massive corrections at any moment. But on closer inspection, these absurdly high P/E and payout ratios may not be so bad:

Big drop-offs in earnings have significantly affected both companies, but these drops are mostly linked to one-time occurrences (such as losses related to pension and benefit shortfalls). If the companies can indeed meet expectations going forward, their situation looks less dire, and these short-term concerns may just be a bump in the road:

Forward P/E Annual EPS estimate (Dec-13) Forward payout ratio
T 13.7 $2.52 71.4%
VZ 16.7 $2.80 73.6%

Data acquired from Yahoo! Finance 04/28/2013

As can be seen, both companies look much more attractively valued going forward when looking at more normalized earnings, especially with their more sustainable payout ratios. AT&T Inc. (NYSE:T) appears cheaper than Verizon, especially with its higher dividend supported by a lower payout going forward.

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