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A Long-Term Buy That Investors Should Consider

July 25, 2014 | About:
ovenerio

ovenerio

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In this article, let's take a look at AT&T Inc. (T), a $184.25 billion market cap, which is America’s second-biggest supplier of both mobile-phone and fixed-line-broadband services.

Direct TV

The company agreed to buy DirecTV (DTV), the country’s leading satellite-TV distributor, for $48.5 billion in cash and shares. The deal will create a unique new competitor with unprecedented capabilities in mobility, video and broadband services. The goal is to better meet consumers’ future viewing and programming preferences. The business will constitute a small portion of AT&T's overall business, so in case the deal fails to close (the agreement has been approved unanimously by the Boards of Directors of both companies), there will not constitute a significant impact in the firm. Some investors are wondering about the suitability of the transaction.

Most Important Asset

Wireless remains AT&T's most important asset and the most attractive business with half of sales. The firm´s scale and financial resources to make timely the investments needed contribute to generate strong margins and cash flow. Additionally, the company focuses in two important aspects: the improvements in customer service and cutting costs. The company is seeking opportunities to expand its wireless business in international markets.

Attractive Dividend Policy

Ford has an attractive dividend policy showing its commitment to return cash to investors in the form of dividends as it generates healthy cash flow on a regular basis. The current dividend yield is 5.2%, which is excellent to protect the purchasing power and generate a cash income to investors.

Revenues, Margins and Profitability

Looking at profitability, despite its growing revenue, earnings per share decreased by more than 4.2% in the most recent quarter compared to the same quarter a year ago. The gross profit margin is high; currently it is at 56.37%.

Finally, let´s compare the best measure of performance for a firm's management: the return on equity. The ROE is useful for comparing the profitability of a company to that of other firms in the same industry.



Ticker



Company



ROE (%)



T



AT&T



20.06



S



Sprint Corporation



-61.04



VZ



Verizon Communications Inc.



2.64







Industry Median



11.68



The company has a current ROE of 20% which is higher than the one exhibit by its peers: Sprint Corporation (S) and Verizon Communications Inc. (VZ). In general, analysts consider ROE ratios in the 15-20% range as representing attractive levels for investment, so this ROE looks very attractive. It is very important to understand this metric before investing and it is important to look at the trend in ROE over time.

1406262455920.png

The company's current return on equity greatly increased when compared to its ROE from the same quarter one year prior.

Relative Valuation

In terms of valuation, the stock sells at a trailing P/E of 10.4x, trading at a discount compared to an average of 23.8x for the industry. To use another metric, its price-to-book ratio of 2.1x indicates a discount versus the industry average of 2.79x while the price-to-sales ratio of 1.45x is below the industry average of 1.74x. All the metrics indicate that the stock is relatively undervalued and seems to be an attractive investment relative to its peers.

As we can see in the next chart, the stock price has an interesting upward trend in the five-year period. If you had invested $10.000 five years ago, today you could have $19.677, that is a 14.5% compound annual growth rate (CAGR).

1406262437746.png

Final Comment

The telecom services industry is a mature, cyclical, capital intensive and has high entry barriers due to the dominance of well-established players with strong brand identities like AT&T.

The reasons we have discussed make me feel bullish on this stock. So in this opportunity, I would recommend fundamental investors to consider this attractive option for their long-term portfolios.

Hedge fund gurus like Louis Moore Bacon (Trades, Portfolio), Bruce Berkowitz (Trades, Portfolio), John Hussman (Trades, Portfolio), David Dreman (Trades, Portfolio), Joel Greenblatt (Trades, Portfolio), Steven Cohen (Trades, Portfolio), Robert Olstein (Trades, Portfolio), Brian Rogers (Trades, Portfolio), Jeff Auxier (Trades, Portfolio), Murray Stahl (Trades, Portfolio), Bill Frels (Trades, Portfolio) and Irving Kahn (Trades, Portfolio) added this stock to their portfolios in the first quarter of 2014.

Disclosure: Omar Venerio holds no position in any stocks mentioned

About the author:

ovenerio
We provide independent fundamental research and hedge fund and insider trading focused investigation.

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