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As a value investor with a bit of a contrarian mindset, I naturally gravitate to stocks and industries that the market at large has discounted. Where most investors will look at a stock that is trading at yearly lows and immediately dismiss it as a viable investment, I will almost always take an extra look at the stock and its fundamentals, because those are the situations that tend to yield the best bargains no matter what is going on in the broad market.
The telecommunications sector is an area of the market that most investors have been dumping since the beginning of 2017. Over that time period, the industry as measured by the iShares Telecommunications ETF (IYZ) is down more than 22%. Consolidation in the industry over the past few years has left just two really dominant players in the integrated telecommunications space, Verizon Communications Inc. (VZ) and AT&T Inc. (T). T’s price pattern since 2017 matches the downward trend of the broad industry, with the stock down more than 26% over the period. This is an extremely competitive industry, and it is true that revenues for many of these companies have been flat for the past year or so due to competitive pricing pressures; however it is also safe to say that market has probably over-discounted the industry as a whole. That’s a good thing for bargain hunters like me, because that creates some really attractive long-term opportunities in these kinds of stocks.
T is one of those large-cap companies that we’ve all heard of, and there’s an excellent chance that you use one of more of the services that they offer. That’s because they’ve grown and diversified their business across a large number of business segments that make them a lot more than just the “phone company” that they used to be. Just last month, they completed what may have been the largest acquisition in the market so far this year, buying broadcast media giant Time Warner Inc. for $85.4 billion. They also own satellite TV provider DirecTV, and not surprisingly are pouring a massive amount of capital into building 5G infrastructure, the next phase of wireless technology and connectivity that will facilitate the next step in the continued emergence of the Internet-of-Things.
Fundamental and Value Profile
AT&T Inc. (T) is a holding company that provides communications and digital entertainment services in the United States and the world. The Company operates through four segments: Business Solutions, Entertainment Group, Consumer Mobility and International. The Company offers its services and products to consumers in the United States, Mexico and Latin America and to businesses and other providers of telecommunications services worldwide. It also owns and operates three regional TV sports networks, and retains non-controlling interests in another regional sports network and a network dedicated to game-related programming, as well as Internet interactive game playing. Its services and products include wireless communications, data/broadband and Internet services, digital video services, local and long-distance telephone services, telecommunications equipment, managed networking, and wholesale services. Its subsidiaries include AT&T Mobility and SKY Brasil Servicos Ltda. T’s current market cap is $195.2 billion.
- Earnings and Sales Growth: Over the last twelve months, earnings grew almost 15% while revenues were mostly flat, posting a decline of about 3%. The slight decline in revenue is pretty consistent with the industry trend, and industry experts in general expect that pattern to continue through 2018, with flat revenues in 2019. That puts a premium on companies that can manage costs effectively. T fits that description nicely, with Net Income for the past quarter a healthy 12% of Revenues. For the year, that measurement increases a little over 19%.
- Free Cash Flow: T’s free cash flow is very healthy, at more than $18 billion. While this number declined modestly in the last quarter, for the year it increased by a little more than $1 billion.
- Debt to Equity: T has a debt/equity ratio of .91, which by most measurements is manageable. The company’s long-term debt has almost doubled since early 2015, but their balance sheet indicates that operating profits are more than adequate to service their debt, with healthy cash and liquid assets (more than $48 billion posted in the last quarterly report) to provide additional flexibility and liquidity.
- Dividend: T pays an annual dividend of $2.00 per year, which at its current price translates to an annual yield of about 6.29%. This is well above the industry average as well as the S&P 500 average of 2.0%; more compelling is that despite the high yield, their payout ratio is just a little over 50% of their past year’s earnings.
- Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but one of the simplest methods that I like uses the stock’s Book Value, which for T is $23.69 and translates to a Price/Book ratio of 1.32 while the industry average is 1.8. More interesting is the fact that their 5-year historical average Price/Book ratio is 1.94. A rally to par with its historical average would put the stock at about $46.50. That offers a long-term upside of 46% over the stock’s current price.
Here’s a look at the stock’s latest technical chart.
- Current Price Action/Trends and Pivots: The red diagonal line traces the stock’s 2-year downward trend, from a high around $44 per share to a trend low in May around $30.50 per share. The stock rebounded from that point to hit a short-term high around $34.50 before dropping back again. It is now hovering close to that trend low, a point that has offered good support on multiple occasions since then. The red horizontal lines on the right side of the chart mark the stock’s Fibonacci trend retracement levels, which I expect to act as resistance against a reversal of the current downward trend. The stock would have to break above the $36 marked by the 38.2% retracement line to confirm a trend reversal. The $30 to $31 should offer strong support, since this level has marked the lowest point the stock has reached since the beginning of 2014. A break below $30 could see the stock drop down to its next major support around $27, last seen in late 2011.
- Near-term Keys: If you’re a short-term trader, look for a push above $32 with good buying volume; that could provide a good signal to enter a short-term bullish trade using call options or by buying the stock outright. If you’re willing to take a longer-term view and don’t mind seeing the stock hover in its current range, or even move lower in the short-term, the stock’s dividend yield could be a very attractive incentive to hold the stock and wait for the trend reverse. The long-term target price offered by the low Price/Book ratio right now would put the stock a little above its highest level since 2001. If the stock breaks down and moves below $30, a short-term swing trade using put options or by shorting the stock could also be attractive.