AT&T, Inc. (T - Free AT&T Stock Report) stock has plodded along for much of the past year. The shares have largely traded sideways, missing out on the large bull market run many stocks participated in during 2014. The company’s performance has been bolstered by a number of factors, including good cost management, share repurchases and traction for its latest broadband, video, and IP telephone service, namely U-verse. But these positives seem to be mostly overshadowed by lackluster wireless subscriber trends and a myriad of bottom-line pressures. A transition to more-competitive mobile pricing plans has pinched the carrier’s margins. The new discount plans, which include the popular “Next” program (it allows consumers to pay a small monthly fee for the privilege of upgrading their phones every year without a down payment), have reduced churn to record levels and been a blessing for wireless subscriber growth. However, they have squeezed profits by pushing ARPU (average revenue per user) metrics lower. Further, a shift away from legacy operations, rising content expenses, heavy infrastructure spending and swelling investments for large network build-outs have weighed on profitability. Thus, at this juncture, are these shares suitable for investors seeking a position in the telecommunications services sector? In this article, we try to answer these questions by taking a brief look at AT&T’s business by performing an easy-to-follow SWOT analysis of the company, evaluating its strengths, weaknesses, opportunities and threats.
Business
AT&T, formerly known as SBC Communications Inc., was formed as one of several regional holding companies created to hold AT&T Corp.’s local telephone companies. On January 1, 1984, it was spun-off from AT&T Corp. pursuant to an antitrust consent decree, becoming an independent publicly traded telecommunications services provider. In November 2005, one of the company’s subsidiaries merged with AT&T Corp., creating one of the world’s leading telecommunications providers. In connection with the merger, the name of the business was changed from “SBC Communications Inc.” to “AT&T Inc.” Several years following the consolidation, substantially all of the telecom’s services and products were marketed under the AT&T brand name. In 2013, the company launched a new wireless brand, Aio, offering prepaid services and devices with no annual contract. Today, AT&T, Inc. maintains its corporate headquarters in Dallas, Texas, has roughly 248,000 employees, and registers annual revenues in the neighborhood of $130 billion.
Strengths
Wireless Capabilities: In the United States, AT&T now covers all major metropolitan areas and serves approximately 300 million people with its LTE technology. It also provides 4G coverage using various other technologies, and when combined with the company’s upgraded backhaul, the carrier should be able to enhance its network capabilities and provide superior mobile broadband speeds for data and video services. Moreover, AT&T’s wireless network also relies on other GSM digital transmission technologies for 3G and 2G data communications. The telecom service provider continues to expand the number of locations, including airports and cafés, where customers can access broadband Internet connections using wireless fidelity (local radio frequency commonly referred to as Wi-Fi) technology.
Data/Broadband Offerings: As the communications industry continues to move toward Internet-based technologies that are capable of blending traditional wireline and wireless services, AT&T plans to offer services that take advantage of these new and more sophisticated technologies. In particular, the company intends to continue to focus on expanding its AT&T U-verse high-speed broadband and video offerings, while developing IP-based services that allow customers to unite their home or business wireline services with their wireless service. In addition, this company’s size and leverage ought to allow it to take advantage of a maturing telecommunications space via increased spectrum, capacity, and data services.
Weaknesses
Tighter Margins: Price wars between large wireless phone service providers have hurt overall profits at AT&T. Moreover, recent smartphone introductions, such as Apple’s (AAPL) iPhone 6, have spurred many customers to jump ship. Low-cost and pay-as-you-go plans from peers like Sprint (S) and T-Mobile have chipped away at AT&T’s market share and customer base. Furthermore, the carrier’s spending on updated networks and infrastructure have driven up expenses and added to its already sizable debt obligations. Too, we believe the rising cost of content for mobile providers will likely hinder earnings growth over future quarters.
Lack of Flexibility: AT&T’s vast size and complex structure often leaves it struggling to adapt to a volatile wireless segment. Smaller, more nimble competitors can bring new products to market faster and generally with lower development expenses. Moreover, other businesses can tweak discount payment programs and data offerings more frequently without disturbing a massive customer base. AT&T must also remain mindful of changing FCC regulations that could impact its ability to gain spectrum and capacity.
Opportunities
Acquisitions: AT&T has been no stranger to the rampant M&A activity present in the telecommunications space. Recently, the company agreed to purchase DirecTV (DTV) for roughly $48.5 billion in cash and stock. Although the pay-for-television market is fairly mature, the deal enables AT&T to expand its video offerings and negotiate content agreements with the nation’s largest media outlets. In addition, the transaction provides the company with access to DirecTV’s 18 million subscribers in Latin America, while boosting its cash flow potential and generating annual cost savings in the neighborhood of $1.5 billion in three to five years. Extra free cash flow is vital for AT&T at the moment, since it has chosen to invest heavily in its wireless/broadband lineup.
A Fully-Developed Next Platform: The company’s acquisition of prepaid carrier Leap Wireless should help fend off rivals and attract a greater number of lower-income consumers. Its revamped Next arm has been successful in the early going, steering customers away from peers and positioning itself within the value-oriented discount plan arena. The new programs should decrease the carrier’s churn rate, as it seeks to capitalize on consumers’ desire for the latest smartphone offerings and unwillingness to place considerable money down at time of purchase. Going forward, Next’s traction will likely lead to higher subscriber signings and more-stable margins.
Threats
Enhancement Capacity/Spectrum: Data transmission speeds and overall usage have grown exponentially over the past year. In that vein, wireless carriers have experienced soaring costs for the right to lift capacity and spectrum, especially within highly populated metropolitan areas. Typically, wireless providers compete based on accessibility, reliability, speed of transmission, and price. Since many businesses have reached parity on those fronts, price and capacity/spectrum have received a premium. Presently, AT&T is primed to spend more than $40 billion bolstering its network across densely populated cities, most notably New York, Los Angeles, Chicago, and Dallas.
Continued Price Wars: Sprint has developed a new campaign aimed directly at telecom giants Verizon (VZ – Free Verizon Stock Report) and AT&T. Sprint has offered to slash customers’ wireless bills in half if they switch. Once consumers choose a plan and port their numbers to Sprint, the company will deliver unlimited talk and text on its network while providing data to them at half the cost of their previous program. These deals could harm AT&T’s market share ahead. Although consumers typically win during these price wars, service providers’ margins generally suffer.
Conclusion
All told, shares of this telecommunications giant may appeal to a large variety of investors. The stock offers conservative accounts a good source of income compared to other selections. In addition, the equity seems appealing on a price-to-earnings basis, representing a good bargain at its current price levels. Most will find that sizable wireless carriers, such as AT&T, generate solid cash flow and are better-equipped to navigate turbulent times within the industry. The company’s retooled Next platform, U-verse video offerings, and pending deal with DirecTV have it poised to register modest top- and bottom-line growth over the long haul. Strong brand loyalty and a solid market share within vital cities augur well for AT&T going forward. Thus, this stock looks to be a good fit for most portfolios, especially those with safety and income as a top priority.
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