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The Morning Monte


AT&T INC. (T) Thursday, July 23, 2015

Published: 8/5/2015 10:10:00 AM UTC

AT&T reported Q2 2015 earnings on July 23.  Non-GAAP EPS of $0.69 beat analyst estimates by $0.06.  GAAP EPS was $0.58, down from $0.68 in the prior year period.  Revenue of $33.02 billion was 1.4% higher year-over-year, in line with analyst estimates.  The company added 2 million wireless subscribers in the quarter.

Prudena's models indicate that AT&T is appropriately valued. There is no reason to expect above-market price appreciation, though a healthy dividend yield will attract investors seeking stability and income.

Value Breakdown

Assuming 8% required rate of return, the current market price of $34.58 implies 1.14% long term residual earnings growth.  This is a reasonable level, given AT&T's growth history and ROE.  Prudena's residual earnings model estimates value per share of $35.19.  This model assumes EPS in line with analyst estimates over the next two years, 3.5% EPS CAGR over the next five years, and low single digit growth in the long term.  A Monte Carlo simulation, which builds input uncertainty into the residual earnings model returns a value distribution ranging from $30.94 to $39.67 and a most likely value of $34.55.  Both models agree very closely with current share prices.

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Value Probability Distribution

Conclusions ...

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NOTE: The Morning Monte is high-level, and any investment requires a deeper analysis than is presented here. The comments in the Morning Monte are intended to help guide your research and ground you in the fundamentals of the company. In no way should the comments in The Morning Monte be taken as advice to buy or sell a particular equity. Some of the statements are forward looking. As such, these statements are speculation--so beware! The comments represent the views of the author and are not necessarily the views of PRUDENA™.

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About AT&T INC.

AT&T (NYSE: T) is a telecommunications company which offers wireless and wired communication services businesses and consumers in the US, Mexico and Latin America.  AT&T's wireless solutions include mobile data services, and local and long distance voice services for consumers, small businesses and government.  The wireless segment also offers equipment and accessories such handsets and battery chargers. The wireline segment offers wired solutions such as U-verse TV and Internet access, VOIP services, secure network management to businesses, data and voice communication services.  AT&T has frequently used acquisitions to bolster growth and enter adjacent markets.  Its recent acquisitions include Spectrum, Leap, GSF Telecom, NII Holdings Inc and DIRECTV.  Major competitors in the wireless segment include Verizon (NYSE: VZ), Sprint (NYSE: S) and T-Mobile (NYSE: TMUS). 

In 2014, net sales totaled $132 billion, a 3% increase year-over-year. The majority of the company’s revenue was generated by its wireless operations which amounted to nearly $74 billion, or 55%, of the total operating revenue.  The wireline segment generated the balance of revenue.  AT&T is based in Dallas, Texas.