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AT&T Down but Far from Out

March 03, 2014 | About:
Ravagadus

Ravagadus

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It is the mighty cash cow of the telecom industry, but lately it has been rather disappointing. As the stock price of AT&T (T) plunged to a 52-week low last week, many of us might be wondering why.

A Bit of History

AT&T (T) has been through similar periods of Lull right through its inception, characterized by slow or no growth. However, what is heartening to see is that the company has from time to time taken full advantage of breakthrough technologies by taking the first mover advantage.

Take for instance the late 1990s, when the company initiated proactive distribution strategies during the Internet boom that literally doubled its revenues.

More lately, it has taken positive action during the data revolution brought about by smartphones, now an integral part of the American household. This time too, AT&T covered a lot of ground to make hay while the sun shone!

Even now, while the company is taking advantage of its strong growth in the cable and wireless industry, investors are probably waiting for that next big revolution to give the company a much needed push.

Troubled Waters

Speaking of the next big revolution in technology, here comes the part that is a bit worrying for AT&T. It is the belief that users will eventually trend toward text messaging, social media and Internet calling. It is this belief that made Facebook (FB) wager a tenth of its market value to acquire Whatsap. This trend will over time decrease the amount of minutes people talk on their mobile phones and is bound to impact the telecom industry as a whole.

We are also observing a pattern in the U.S. market where customers are discarding expensive telecom providers like AT&T and Verizon (VZ) for lower-cost providers like T-Mobile and MetroPCS even at the cost of lower quality and wireless speed.

Better Times Ahead

However, things don’t look all that bad for AT&T. There are some ambitious plans that the management has in mind, which include a large acquisition in Europe.

AT&T's entry into the House Monitoring industry, through Digital Life products, is also much anticipated and might change the dynamics of the market substantially.

What needs to be mentioned here is that in spite of the low stock prices, the company’s margins have been excellent. Where the gross margin historically hovers around 50%, the current gross margin is 60%; even the net profit margin of 14% is outstanding compared to the industry average. The company can increase its margins further by making most of its economy of scale; however, it has to be wary of its low-cost competitors.

If you are looking for a stock with a high dividend yield, and a limited downside, you might want to buy AT&T near the bottom.

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Ravagadus
Banker-Dreamer-Freelance writer

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