Today, well look at AT&T (NYSE: T ), the telecommunications company fighting
for market share along with many other competitors. Among its more popular
offerings are wireless voice communication, long-distance and roaming services,
as well as landline voice services. It sells handsets, wireless computers,
personal computer wireless data cards and accessories. What you might not know
is AT&T also offers application management, security service, integration
services, customer premises equipment, government-related services, and
satellite video services, data services, Internet access and network
integration, data equipment and U-verse services, as well as DSL/broadband,
dial-up Internet access and Wi-Fi products. One of the key driving factors for
AT&T is that the company is in a seemingly never-ending war with myriad
competitors, though it is the No. 2 player in the U.S. Still, telecom services
are, at this point, a commodity. That means the ultimate winner is going to be
the company that markets the best and has the best customer service. Margins
will get increasingly thinner. Stock analysts looking out five years on AT&T see
annualized earnings growth at a meager 3.77%. Thats about what growth itll have
this year, and after a projected bump up of about 7% in FY 2012, that suggests
annualized growth from then to 2015 will be around 3%. Thats pretty moribund
growth. At a stock price of $28, on FY 2011 earnings of $2.38, the stock
presently trades at a P/E of 12. Verizon (NYSE: VZ ) trades at a 15 P/E, while
Sprint Nextel (NYSE: S ) doesnt even have a P/E ratio because its losing money.
So, things could be worse for AT&T. Looking at AT&Ts financials, the company has
$3.83 billion of cash on hand but carries a whopping $58.6 billion in long-term
debt, at an interest rate of about 5%. Fortunately, trailing 12-month free cash
flow was an amazing $17 billion, so debt service is very manageable. The company
also had 1.7 times the amount of free cash flow necessary to pay its 6.2%
dividend. I have some concerns about the increasing competition affecting cash
flow going forward. The companys run rate will put its FY 2011 free cash flow
around 10% below last years. Its something to keep an eye on. There have been no
insider purchases of for quite some time, and thats a concern when coupled with
the free cash flow issue. Conclusion Placing a 4 P/E on AT&T, with projected
2015 earnings of $2.86 per share, gives us a price target of $11.40. Thats only
a 10% return from here. However, the fact that it generates so much cash each
year about $3 per share worth means we can boost that target. Conservatively
assuming $2 per share in free cash flow, wed add $10 to the price target, which
becomes $21.40. Thats a 21% decrease from here, but if you include reinvested
dividends, theres a tiny 4% to 6% appreciation from this point. This suggests to
me that I would sell AT&T if you presently hold it in a regular account, and if
free cash flow continues to fall, I would even consider selling short going
forward. Retirement investors are taking on some long-term capital depreciation
risk, but the generous 6.2% dividend makes up for that. I would caution to keep
an eye on free cash flow. If 2011 is less than 2010, and the trend continues in
2012, I would sell. For now, however: I believe AT&T is a sell for regular
accounts. I believe AT&T is a buy for retirement accounts. Lawrence Meyers does
not own shares of AT&T.
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