Verizon Communications Inc. (VZ): Is AT&T Inc. (T) Destined for Greatness?

Investors love stocks that consistently beat the Street without getting ahead of their fundamentals and risking a meltdown. The best stocks offer sustainable market-beating gains, with robust and improving financial metrics that support strong price growth. Does AT&T Inc. (NYSE:T) fit the bill? Let’s take a look at what its recent results tell us about its potential for future gains.

What we’re looking for
The graphs you’re about to see tell AT&T Inc. (NYSE:T)’s story, and we’ll be grading the quality of that story in several ways:

Growth: Are profits, margins, and free cash flow all increasing?

Valuation: Is share price growing in line with earnings per share?

Opportunities: Is return on equity increasing while debt to equity declines?

Dividends: Are dividends consistently growing in a sustainable way?

What the numbers tell you
Now, let’s take a look at AT&T Inc. (NYSE:T)’s key statistics:

T Total Return Price data by YCharts.

Passing Criteria	3-Year* Change	Grade
Revenue growth > 30%	3.8%	Fail
Improving profit margin	(42.7%)	Fail
Free cash flow growth > Net income growth	15% vs. (40.5%)	Pass
Improving EPS	(35.5%)	Fail
Stock growth (+ 15%) < EPS growth	64.8% vs. (35.5%)	Fail

Source: YCharts. *Period begins at end of Q2 2010.

T Return on Equity data by YCharts.

Passing Criteria	3-Year* Change	Grade
Improving return on equity	(34.2%)	Fail
Declining debt to equity	58.5%	Fail
Dividend growth > 25%	7.2%	Fail
Free cash flow payout ratio < 50%	52.1%	Fail

Source: YCharts. * Period begins at end of Q2 2010.

How we got here and where we’re going
Things don’t look very favorable for AT&T Inc. (NYSE:T) today — the telecom giant musters a miserable one out of nine passing grades. Its revenue growth fails to keep pace with three years of inflation, and a weakened net margin has been its main sources of weakness. However, AT&T shareholders have enjoyed solid growth over the past three years as investors flock to perceived safe havens. Is AT&T’s share-price improvement sustainable, or will its recent fundamental weaknesses produce underperformance going forward? Let’s dig a little deeper to figure out what the future may hold.

Despite rather underwhelming top and bottom-line growth in recent quarters, AT&T Inc. (NYSE:T) is still finding some growth in a saturated market. In its latest quarter, the company sold a record 6.8 million smartphones, and added 551,000 postpaid customers to its subscriber base. AT&T has also been looking for overseas acquisition targets as U.S. wireless market growth has stagnated over the past few quarters. This may be necessary in light of continued industry consolidation — Verizon Communications Inc. (NYSE:VZ) has recently announced a takeover of Vodafone‘s 45% stake in Verizon Wireless in a monstrous deal worth $130 billion.

AT&T Inc. (NYSE:T) never really had a chance of gaining a stake in that company, but with any buyout of T MOBILE US INC (NYSE:TMUS) long since rejected by federal regulators, and with Sprint Nextel Corporation (NYSE:S) becoming a Softbank property, the U.S. wireless industry has been effectively decided for the foreseeable future. All that remains now is a price war, and that will not help AT&T’s flagging margins at all.