AT&T Still Risky

AT&T's (NYSE: T  ) massive $7.1 billion loss in the third quarter shouldn't come as a shock. The struggling long-distance phone company warned of the trouble weeks ago with its decision to write down $12.5 billion in assets and lay off 12,500 employees.

What's more surprising is that AT&T's results were less bleak than expected. While total sales fell 12% to $7.6 billion, Wall Street was expecting sales of $7.3 billion. Revenues from AT&T's business services unit held steady from the second quarter for the first time in two years, despite predictions that business revenues would continue to fall.

AT&T's third-quarter report is fairly upbeat. The market seems to like AT&T's $3.5 billion cash balance and free cash flow generation that -- at least for now -- is propping up AT&T's $0.95 per-share annual dividend.

But Fools take note: Don't get too excited about a couple of less-bleak-than-expected numbers. AT&T still has more than its fair share of risk. There are good reasons to steer clear of the stock -- especially at its current price of $15.96.

AT&T's departure from its $8 billion consumer long-distance business will likely translate into even faster revenue declines. Falling revenues translate into shrinking free cash.

AT&T is gambling on the business unit for future growth. Investors should be concerned about growth in the corporate segment in the face of brutal price competition from MCI (Nasdaq: MCIP  ) and Sprint (NYSE: FON  ) , and even cable operators such as Comcast (Nasdaq: CMCSA  ) and Baby Bells Verizon (NYSE: VZ  ) , SBC Communications (NYSE: SBC  ) , and BellSouth (NYSE: BLS  ) have a stake in the market. The long-haul business environment is going to be tough, to say the least.

Sure, AT&T has aggressively cut its debt from a peak of $60 billion through asset sales and debt buybacks, but net debt still comes in at a hefty $7 billion. AT&T has to take care of other obligations, including pensions and retirees' health. Plus, this month's big asset writedown will drive up AT&T's deferred tax bills in the coming years.

Valuing AT&T is tricky. AT&T is trading at a free cash multiple of 4 and a price-to-earnings ratio of 10, well below its peers. But, with AT&T's rapidly shrinking business, multiples of free cash flow and even earnings could be a "value trap" for investors.

Given the double-digit revenue declines, AT&T's 6.2% dividend yield doesn't look too enticing. Consider that long-distance competitor (and Motley Fool Inside Value recommendation) MCI yields 10%; SBC Communications, with its sturdy business model, yields a healthy 4.7%. An 8% yield is probably more apt for AT&T given its risky outlook, which prices the company at about $12 per share.

For related Fool Takes, dial up:

Fool contributorBen McClure hails from the Great White North. Ben doesn't own any shares mentioned here.


Read/Post Comments (0) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 502801, ~/Articles/ArticleHandler.aspx, 8/21/2014 5:06:35 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement