Should AT&T Be Part of Your Portfolio?

The wireless industry is taking an interesting turn with rising threat from smaller national carriers Sprint and T-Mobile (NYSE: TMUS  ) . While Sprint is intensely involved in building its Network Vision, T-Mobile is aggressively working on marketing campaigns targeting budget-bound customers to shift from rival networks, particularly AT&T (NYSE: T  ) . However, the Dallas carrier's third-quarter results for the fiscal year stayed strong as its subscriber base showed decent growth and its data plans generated good revenue. 

Quarter in a snapshot
AT&T's consolidated revenue increased 2.2% to $32.2 billion compared to the same quarter last year. Wireless revenue went up 5.1% to $17.5 billion, while operating income increased 3.4% to $4.6 billion. Increasing data usage from heavy Internet users led the carrier to report a 17.6% rise in wireless data revenue. The continued shift to smartphones, tablets, and similar devices has increased the consumption of data, driving wireless revenue growth. 

AT&T's operating income marginally increased to $6.2 billion from $6 billion in the third quarter of 2013. The net income attributable to AT&T was $3.8 billion over last year's $3.6 billion. The mobile operator posted a solid quarter, though there were concerns regarding increased competition from T-Mobile, thanks to new smartphone connections and higher average revenue per user, or ARPU, which notably bolstered wireless revenue.

Subscriber additions -- the savior
The second-largest national carrier is currently focusing on subscriber addition and boosting ARPU. AT&T recorded a total increase of nearly 989,000 wireless subscribers during the quarter. Of the total, 363,000 connections were postpaid customers, more than twice the additions that the company made last year. This is good news for the carrier, as postpaid connections are most profitable.

In addition, of the total postpaid connections, 178,000 were smartphone users who are increasingly becoming heavy Internet consumers. This is precisely why AT&T's ARPU for smartphone subscribers is more than twice the ARPU of its non-smartphone customer base. This automatically boosted the ARPU for postpaid handsets, which rose 3.1%. Also, AT&T experienced record sales of 6.7 million smartphones, which accounted for 89% of postpaid sales for the quarter. The expansion of the smartphone base is essential to driving ARPU growth, and in turn, wireless revenue in the face of rising competition.

Unfortunately, the situation doesn't look so promising for AT&T anymore. Increasing subscriber base is a necessity for any carrier to grow, but if AT&T charges more to enjoy higher ARPU, it may lose a good number of subscribers to Sprint and T-Mobile, in particular, which is very candid about offering lower plan prices to lure customers away from AT&T's network.

Growing threat
Previously, Verizon (NYSE: VZ  ) was the only carrier effectively competing with AT&T. But, now both of the smaller national players are putting in huge effort to give solid competition to the virtual duopoly.

Verizon recently reported its third quarter earnings, posting 4.4% increase in revenue to $30.3 billion. The revenue growth was led by the wireless segment, which recorded 7.2% revenue growth. The top carrier's ARPU went up 7.1% to $155.74. However, Verizon was a bit disappointed with its net customer additions.

T-Mobile, on the other hand, is increasingly posing a threat to the telecom giants, AT&T in particular. The fourth-largest national player is offering simplified, cheaper plans to win subscribers from bigger rivals. The carrier recorded the addition of 685,000 contract subscribers in the last quarter. Also, T-Mobile is pretty vocal about targeting AT&T's customer base. Just before AT&T released its earnings, T-Mobile announced its free monthly data offer of 200MB for iPad users.

Foolish bottom line
AT&T's third quarter has been impressive. Competition is heating up, but AT&T is also planning its moves accordingly. The carrier made a huge capital investment of $6 billion in the third quarter for network upgrading to keep its edge over Sprint and T-Mobile. Currently, Verizon leads as far as LTE network coverage, which has helped the telecom player maintain its supremacy over fellow rivals. AT&T's LTE network covers around 250 million Americans. The wireless provider is expected to spend heavily on network upgrades over the next couple of years. Obviously, such huge investments would build pressure on the company's profitability margins, but they are unavoidable if the carrier wants to stay competitive.

AT&T is currently trading at a price-to-earnings ratio of 25.89 and is expected to grow in the future. As per its projected earnings for the next fiscal year, the stock is trading just 13.18 times its earnings. In fact, AT&T is the most attractive stock compared to its peers. Verizon has a forward P/E of 14.41, while T-Mobile is has a forward P/E 32.05.

Additionally, AT&T has made huge investments to differentiate its network, providing quality and high speed Internet service. In fact, the carrier's network speed beats Big Red's speed as found in recent tests. AT&T has an encouraging future outlook and I strongly believe that this cheap telecom stock could add spark to your portfolio.

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