Key ratios
Price: $37.12
EPS: $4.76
Div Yield: 5.34%
P/E: 7.87x
P/CF: 6.13x
P/FCF: 8.0x
Return On Assets: 6.94%
Return on Equity: 22.31%
Overview
Over the last few years, the markets have kept going up, creating little to no opportunities for value investors. Nearly all equities are selling for premiums above the value of the business thanks to Trump's election and now tax cuts. This makes it hard for value investors to find cheap stocks selling with a margin of safety.
However, there are still some areas in the market where you can find cheap assets. AT&T (T, Financial) is one of those cheap companies that has been ignored by the markets over the last few years. Today the company is offering a dividend of over 5% and is selling for seven times its 2017 earnings and eight times its 2018 projected earnings. AT&T doesn't need the merger with Time Warner to continue to grow and expand its operations, domestic and foreign. The company will continue to see earning and free cash flow growing going forward.
Fourth quarter of 2017
In the fourth quarter, AT&T saw net sales of $41.7 billion, which were in line with estimates. The company reported earnings per share of 78 cents for the fourth quarter, a beat of 13 cents a share. AT&T did better than what Wall Street expected in the fourth quarter and continue to see free cash flow growth. During the fourth quarter, AT&T saw cash flow from operations of $9.9 billion and free cash flow of $4.8 billion.
Full-years financial results
AT&T saw record revenues of $160.5 billion in 2017 and net income of $29 billion or $4.76 per share. The company saw its earnings increase by 76 cents thanks to the tax cuts passed at the end of last year. The company produced cash from operations of $39.2 billion and free cash flow of $17 billion. AT&T expected to see free cash flow increase by additional $4 billion in 2018 to $21 billion. The company is a free cash flow cow with free cash flow continuing to grow going forward. Strong cash flow and free cash flow will allow AT&T to expand its 5G network and begin to reduce its debt load over time.
AT&T expects earnings per share in 2018 to be in the range of $3.50 with capital expenditures between $20 billion and $25 billion. Due to the tax cut bill, AT&T will put an additional $1 billion in incremental capital investment to work in 2018. At the end of the fourth quarter, AT&T handed out $200 million in bonuses toits employees and added $800 million in voluntary medical plans as well. Clearly, the tax cut is leading to the business investing in its workers and plant and equipment.
The company's long-term economics don't need the Time Warner merger if the U.S. government won't allow it. However, AT&T CEO believes that the company will beat the government in court and complete the merger towards the end of 2018.
Valuation
Currently, AT&T shares are under pressure even after reporting better-than-expected results for the fourth quarter and year. Clearly, the market is worried about the merger with Time Warner and stiffer competition from the likes of Netflix and Amazon.
It would be great for AT&T to get its hands on Time Warner's assets. The company has created a cloud-based DVR and expanded its Directv Now, which has over 1.2 million people using its streaming platform. AT&T is determined to be the first in the deployment of 5G network in the U.S. The company is expected to have it rolled out in major cities by the end of 2018.
Currently, the company is selling for seven times earnings and six times its cash flow. The low valuation for the company creates a margin of safety for investors who purchase shares. Most of AT&T competitors, like 21st Century (FOXA, Financial), trade at 17 times their earnings. Historically AT&T sold for 14 to 15 times their earnings, not below 10 times. The company will grow earnings and cash flow going forward and should trade at higher multiples.
Based on 2017 earnings and expected earnings for 2018, AT&T should trade between $66.20 and $49.00 a share at 14 times earnings. The company has produced constant earnings over time, with growth averaging 5% annually. Based on this, in 10 years, AT&T would be earning $7.83 per share. This doesn't include dividends, inflations and future share buybacks. AT&T's intrinsic value exceeds its current market value by at least 21%. The company's intrinsic value is between $61 and $78 a share, providing investors with a margin of safety between 21-30%.
Disclosure: I do not own shares of AT&T and don't plan on purchasing any in the next 72 hours.
