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.
And then came Google Inc (NASDAQ:GOOG)…
The telecom industry is pretty duopolistic in nature, with Verizon and AT&T dominating most of their smaller competitors by light years. There is a lurking threat– possible a very serious one– coming to light, however. It may be even more threatening than hidden underfunded pension problems that suddenly pop-up. This threat comes from Google Inc (NASDAQ:GOOG).
With Google Fiber, the search-giant is bringing lighting-fast Internet services to select cities. While nothing more than a minor threat to traditional telecom companies now, this threat could be very troubling long term. Google Inc (NASDAQ:GOOG) Fiber is already approved for Kansas City, MO. and Austin, Texas. The next city that Google is eyeing is Provo, Utah, and Provo’s city council recently approved the deal.
Google has a history of being disruptive, and its new fiber-optic ambitions could be a game changer in the future. The company is good at doing things cheaper, and people like cheap.
There’s money in it for Google as well of course, because more people on the Internet most likely means more people using Google’s services and products. It is probably too early to tell how disruptive Google Fiber will or won’t be, but it is something to keep in the back of an investor’s mind if considering putting money into AT&T Inc. (NYSE:T) and/or Verizon Communications Inc. (NYSE:VZ).
The bottom line
While AT&Ts last quarter was disappointing, it was by no means dooming. The sell-off was likely driven by temporary and short-terms problems. Analyst downgrades and profit takers most likely also contributed to the haircut in share price.
Over the long term, however, AT&T looks attractively valued as long as the company meets expectations, which is why I decided to start a small position in the company to “test the waters”. I will also be monitoring the stock much more closely than many of my core holdings as well, to make sure the fundamental story stays intact– especially before adding any more to my position.
AT&T Inc. (NYSE:T) is cheaper than Verizon going forward and offers more yield. Opening up a quarter or half position now and layering in on further dips should pay off, as long as the company can continue to increase earnings and improve wireless margins while adding new subscribers. If searching for a high-yielding blue-chip stock for your portfolio at a good price, now is a good time to consider AT&T.
The article Was AT&T Unfairly Punished by the Market? originally appeared on Fool.com and is written by Joseph Harry.
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