In every stock portfolio, there ought to be a few backups.
Though Verizon would now be an obvious choice for telecommunication, it’s never safe to assume that things will go on as they always have. AT&T (T) has been fighting to overtake them as top dog in cellphone and wireless usage, but their most recent measure (an attempted merger with T-Mobile) has just cost them $4 billion in merger cancellation fees. That means, T-Mobile might have enough cash to overtake Sprint Nextel (S) in telecommunication’s third place, so AT&T (T) has simultaneously given a helping hand to their competition and gotten smacked in the back by eager beavers in the anti-trust FCC boys and the Justice Department. The $4 billion will increase spectrum for T-Mobile’s parent company Deutsche Telekom AG (DTEGF), and improve roaming issues.
Nor do things look stellar for AT&T customers, who’ve been complaining enough to put them at the bottom of Consumer Report’s quality ratings for a few years. The company quote is telling: “Customers will be harmed and needed investment will be stifled”. Translated, this means that AT&T will be looking for ways to increase costs, and with their hands tied for mergers, they’ll have to be creative about expansion to keep investors happy. On the other hand, they can’t afford to lose customers, so even if quality doesn’t improve dramatically, this might be the incentive they need to invest in quality service.
Also, competing against Verizon Communications (VZ) is no joke. Verizon seems to have the Midas touch, buying and swapping “wireless airwaves” across the U.S., from Leap Wireless International (LEAP) and other service companies, and $38 per share stock. They’re consistently rated #1 in size and service quality.
Yet all is not lost. With $31 billion+ in annual revenue, a $4 billion payout will greatly wound but not kill AT&T. They’re big enough to afford setbacks, whereas Sprint can barely afford to compete with T-Mobile. As a European-owned company reeling from the Euro financial crisis, Deutsche Telekom badly needed AT&T’s $39 billion to shore up its issues abroad, and in the U.S. with T-Mobile. Will Draper of Espirito Santo, Portugal’s powerhouse financial group, cautioned against reading too much into the $4 billion of cash and spectrum increases for T-Mobile, estimating that their current issues may cost up to $10 billion to fix. Deutsche Telekom stock “declined 9 percent this year”.
AT&T’s third quarter in 2011 still showed solid gains, beating out Verizon for gains in added subscribers. An additional 2.1 million subscribers in 2011 helped them pass the 100 million subscriber mark. Iphone sales counted for more than half of the 4.8 million purchased smartphones, though Apple has allowed other companies to sell their popular product. Wireline business increased “for the first time in three years” (see 3rd quarter results PDF here). Data-only subscribers grew to 4.5 million, underlining the need to buy increased amount of spectrum to satisfy consumer demands. Perhaps the best news for AT&T, because of its strategic investment in wireless and 4G networks, was the 18% revenue increase for wireless data, topped by 19.3% gains in “strategic business services”. Free cash flow showed almost a $1 billion increase from 2010, and AT&T’s exclusive Blackberries promise to provide four times the wireless speed of former models. The huge reduction in 3Q net profits is troubling but understandable. From 12.3 billion in 2010 to 3.6 billion in 2011 is quite a jump, though the 3Q report shows that 2010 profits had a lot to do with “one time gains” of a tax settlement and Sterling Commerce sale.
Marc Bernstein accurately calls AT&T Inc. (T) stock “a hibernating bear – dormant and unexciting”. He also makes a good case for why it would be wise to invest in AT&T: solid 6% dividends, share prices above $20 “even in the depths of the recession”, and great gain potential. Though it now hovers around $26/share, the “T” stock did rise to $43 in the past, and can do it again.
What might help is the ’emerging devices’ strategy. Consumer excitement over new technology is as important, maybe even more important, than expanding on safe sells such as more wireless phone coverage and more data speed. That’s what helped Apple launch past their branding issues, and into skyrocketing profits from iPhones and iPads. AT&T has 13 million ’emerging devices’, including Vitality GlowCaps, which remind forgetful patients to take their prescriptions. Pet and device monitoring from Garmin should prove a big hit; the GTU 10 comes with a year of wireless service, helping busy people keep track of important things in their lives. The Kindle 3G allows readers to download a book in under 60 seconds; Amazon VP Dave Limp says it’s the “fastest-growing connected device on the AT&T network”.
Don’t ignore bears, even hibernating ones – AT&T might surprise you when it wakes up. It’d be a shame to miss that opportunity on the stock exchange.