April 27, 1999

AT&T for Mom

by Robyn Gearey (RobynG@fool.com)

Trading at $52 15/16 as of April 26, 1999

Hi, Mom! For Mother's Day this year, I'm skipping the flowers and going straight to the good stuff: phones. Well, not phones exactly. This year, I'm giving you the mother of all mothers: Ma Bell.

That's right, good old AT&T (NYSE: T) is the stock I've picked for you. This communications giant has been providing Americans with phone service since 1885. Things went well until 1983, when this granddaddy (or rather, grandmommy!) of the telephone lines was deemed to be too powerful and was broken up into the regional Baby Bells -- who I guarantee you don't call their moms on Mother's Day.

Did AT&T just sit back and bemoan its fate? Well, sort of. Without you there to tell it to stop feeling sorry for itself, gosh darn it, and DO something about its problems, the company languished, plugging along with its long-distance business. Luckily, it came around, and in the past few years, AT&T has undergone a complete transformation -- Ma Bell is no longer the unhip, out-of-touch old lady it once was. In addition to its stalwart long-distance phone service, AT&T now offers Internet access, wireless phone service (for those hard-to-reach Moms -- hint, hint), plus cable, high-speed data lines, and global networking services.

And don't think that AT&T has given up on local phone service either. The company currently provides resold local service in 11 states and recently acquired a local business phone company with revenues of $500 million a year. Plus, through its purchase of cable television company Tele-Communications Inc. (commonly known as TCI) and partnerships with several of TCI's affiliates and media giant Time Warner, AT&T intends to offer local phone service via cable lines to two-thirds of U.S. homes within the next five years.

One of the sweetest parts of the TCI deal is that AT&T also acquired a controlling interest in high-speed Internet cable company @Home (Nasdaq: ATHM). AT&T has been aggressively pursuing the cable strategy, as evidenced by its recent move to bid $58 billion for MediaOne -- the nation's third-largest cable company -- in hopes of breaking MediaOne's already-agreed-upon merger with Comcast.

AT&T's massive realignment hasn't come cheap. To finance its acquisitions, the company recently offered $8 billion in bonds -- the largest corporate bond issue ever. Normally, we Fools are wary of debt, and I know you are, too. But this is an exception. The debt AT&T has taken on is more like a student loan than credit card debt. A student loan helps a kid go to college and become better prepared for the world -- it's an investment in the future. And that's just what AT&T has done. Knowing that it couldn't rest on its long-distance laurels, AT&T is, in essence, going back to school and changing careers.

I'm not going to bombard you with too many numbers -- after all, what AT&T is planning is nothing short of a complete transformation, so it's the future we need to look at, not the past. But rest assured that this is no fly-by-night operation. Although revenues were down during the early 1990s as the long-distance market became increasingly competitive, AT&T has recovered nicely and net income for the quarter ending this past December was up 57% from the same period in 1997. The company earned $2.92 per share in 1998 and is expected to earn $3.26 per share in 1999 and $3.70 in 2000. Over the past 12 months, AT&T's stock has outperformed 84% of the market -- not bad for a giant undergoing a major transformation.

Since we're focusing on future growth, keep in mind that 60% of AT&T's $53.5 billion in revenues came from its 75 million residential long-distance customers. That means there's plenty of room for revenues to grow as AT&T begins marketing its new services to those loyal customers as well as to the new customers it will reach through cable. Since AT&T has the market cornered on repeat purchases -- people make phone calls, watch cable, and surf the Net literally all day, every day -- I'm pretty confident that there will be a continued demand for its services. And we haven't even taken into account the $2.5 billion plus in annual revenue AT&T expects to earn from yet another recent purchase, IBM's Global Network, or AT&T's recent partnership with British Telecom -- both of which will give AT&T a firm position in the global business market.

AT&T is not without detractors. After all, it has very well-established competition -- MCI WorldCom and Sprint, of course, but also the Baby Bells and countless Internet-access providers. AT&T is at somewhat of a competitive disadvantage to the newer companies -- it is all but locked in to the $2.7 billion of after-tax profits it must pay out in dividends. This has hurt the company somewhat and its stock has underperformed the market for the past decade. But times are changing at AT&T, and investors have recently rewarded AT&T's restructuring initiatives by driving the stock up 35% over the past six months.

There are also concerns about the cost of updating TCI's cable lines for two-way communication -- up to $500 per house. AT&T will have to make sure it can retain those customers long enough to make the cost worthwhile. But with the variety of services AT&T can bundle together, it will be able to offer consumers both convenience (just think -- one bill for local, long-distance, and wireless calls, cable, and Internet!) and discounts, helping to guarantee they won't want to switch services.

There are those who still think AT&T is an investment for old ladies, but we've already seen that nothing could be further from the truth. AT&T has a solid brand name recognized by nearly everyone, a product that consumers use countless times each day, plus strong, dynamic leadership in the form of CEO Mike Armstrong, who, since he came on board in 1997, has quickly and effectively brokered AT&T's many recent acquisitions, sold off and spun off several of the company's unrelated businesses, and refocused the AT&T's mission from long-distance behemoth to 21st century communications superpower.

All of which just goes to show that you should never underestimate Ma.

AT&T Company Information:
Trades on NYSE under symbol T
AT&T's website: www.att.com
Current Quote
AT&T's Chart

Other Related Links:
AT&T Message Board
A great post on how to view AT&T's restructuring
Fortune's excellent article on Mike Armstrong
AT&T Woos MediaOne -- 4/23/99

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