Fool Portfolio Report
Tuesday, April 29, 1997
by Jeff Fischer (JeffF@fool.com)


ALEXANDRIA, VA., (April 29, 1997) -- The market moved big on small numbers.

Small -- thus favorable -- economic figures reduced inflationary fears, thereby reducing the fear of an interest rate hike. Soon we expect to report in this column that, "Larger than expected economic figures sent stocks tumbling on renewed fears of an interest rate hike." This circle of emotion has been going on for years: a circle of thought leads into a new circle, which circles back to the old circle, while over time the circle always rolls forward.

Simplified: stocks moved higher today on more buying than selling. Seeing how stocks have performed for the century, it's not surprising that there are more buyers than sellers on any given day.

The Dow made its second-largest point gain in history, adding 179 points. In percentages, the 2% advance doesn't even make the top ten list. The S&P soared an impressive 2.73%, Nasdaq gained 2.10%, and the Fool added 2.06%. With 30% of the portfolio in cash we fared well in keeping pace with the market.

In fact, the only Fool stock to fall was ATC COMMUNICATIONS (Nasdaq: ATCT), dropping to a new low of -- gasp! -- $2 9/16, before closing at a bid of $2 15/16. Seeing how we don't even invest in stocks trading below $5, this little soldier has dropped off our radar. Unfortunately, though, it's already in our barracks, messing up our battle plans.

ATCT announces earnings tomorrow morning before the market opens. Seven cents per share is expected, though we'd be surprised if that number was met. The stock has fallen more than 50% in the last few weeks. Last quarter ATC earned $0.04 on $25 million in revenue, while net margins tumbled to 3.6%. As the company snapshot shows, trailing twelve-month margins are 6.7%.

Revenue is expected to be flat, but if margins increase to more historic levels the company has a chance at an improved quarter. Seeing how the stock has performed, though, any positive surprise will probably be just that: a surprise.

We'll be here tomorrow to go over the earnings.

The Foolish Four had another strong day, rising nearly 2% after rising 2.3% yesterday, in part due to AT&T's rise both days.

For the Fool, AT&T (NYSE: T) is a Dow Dividend holding, mechanically bought and held as long as the stock meets the Foolish Four criteria each August. We needn't analyze the business or the stock -- but! -- it has become quite interesting.

AT&T is Numero Uno in the long-distance business, trailed by MCI and Sprint. The leader is capitalized at a value 18% higher than MCI and Sprint combined; but, AT&T's $57 billion of trailing revenue tops the combined $33 billion earned at MCI and Sprint by a massive $24 billion, or 42%.

So, 42% more in sales is currently getting AT&T a valuation 18% higher than MCI and Sprint.

The stock has struggled during the strong market and in the last 75 weeks has fallen to levels last seen in 1993, with the recent significant slide (over 17%) befalling the stock alongside a disappointing earnings report.

The long-distance leader -- its stock owned by more shareholders in the country than any other -- has fallen on concerns of increased competition, perceived lack of corporate direction, and increasing costs for entry into new markets (in the latest quarter the company's expenses for such new ventures rose 25%, to $1 billion). The firm has been consistently "restructuring" itself to compete in a quickly-changing industry.

The market hasn't taken kindly to AT&T's much-publicized search for direction, but it has treated the stocks of competitors with much more generosity.

At $33 1/4 AT&T's stock is only $2 1/2 above its 52 week low. At this price, the valuation given the company compares with peers as follows:

Price-to-Sales Ratio AT&T 0.7 MCI 1.4 Sprint 1.4
Current Earnings Multiple AT&T 9 MCI 22 Sprint 16

Trailing Net Margins AT&T 10.3% MCI 6.5 Sprint 8.2
Five year est. growth rate AT&T 9% MCI 12% Sprint 10%
Price/Earnings multiple on 1997 estimates AT&T 12.5 MCI 22.0 Sprint 17.6
Current Yield AT&T 4.30% MCI 0.10 Sprint 2.30

The industry leader trades at half the price-to-sales ratio and half the price-to-earnings multiple of its trailing competition; meanwhile, AT&T has over 10% net margins, against 6 and 8% for peers; it currently yields 4.30% against 2.30% for Sprint and basically zero for MCI, and it's estimated to be growing just slightly slower than the smaller secondary companies: 9% vs. 10 and 12%.

These initial numbers beg the question: is AT&T cheap?

AT&T trading at half the multiple of its lesser competition is, on the very base level, akin to Cisco Systems trading at half the multiples of 3Com and Cabletron, while leading the networking market. In reality, Cisco trades at multiples nearly double those of the competition. Of course, with Cisco we're talking about proprietary technology in a young industry, which isn't true with the long-distance industry. Also, Cisco is leading the market going forward, while AT&T has led, but is slipping and working to regain forward momentum. I would never suggest that AT&T deserves twice the multiple of its peers, or even the same multiple... but half?

Why half?

AT&T's balance sheet isn't as strong as the others, sporting more debt and less cash, but its assets are significantly more. Also, the company is seen as having the most reliable service in the country, owns the largest network, sports the best brand name, and controls over 50% of the long-distance market.

The uncertainty of continued restructuring and the expected lower earnings for the next few years certainly weigh on the stock. Communication is in flux, from regulatory changes to cellular phones to the Internet (which will be used as a phone, too). Also, fears of the company losing more market-share are not unfounded, especially as the Baby Bells begin to offer long-distance service; but some of that market-share loss is to be expected -- the result of breaking up a monopoly.

Going forward, uncertainty abounds, but so do the company's strengths. What may be the largest weakness?

Buying NCR proved disastrous for AT&T, as did its managing of Lucent Tech; but now independent, both companies have already made strong progress and Lucent is especially showing leadership in its industry. This further signifies that a large problem at AT&T, mired inside a changing industry, is a management that hasn't been able to grasp and take advantage of change -- both those that the company attempts (NCR and Lucent) and those that are forced upon it.

AT&T believes that it will take at least through the end of this year to "get back on track," but many feel it will be longer. It's not an investment that is likely to soar anytime soon, but how much lower it can go, giving the valuation and the many strengths that this industry leader does hold, is an interesting question. Meanwhile, if the stock rises 11% over the next year, or $3.65 per share to $36.95, it would handily beat the average annual S&P return of 11% after adding the 4.30% dividend.

In the broad scheme, AT&T continues to lead its market with considerable ability, while trading at multiples not seen for several years, and currently offering one of the highest-yields of any Dow stock.

We're mechanically holding the stock until at least August, when we make our annual Foolish Four switch. We hope that Ma Bell begins to recover at least somewhat!

Have a Foolish evening...

Below are numbers from the big three long-distance companies.

AT&T Corp (NYSE: T) $32

Market Cap: $52.5 billion 12-month sales: $57 billion Price-to-Sales Ratio (PSR): 0.7 Trailing net margins: 10.3% Earnings estimate: $2.62 for 12/97, 3 quarters out Far earnings estimate: $2.71 for 12/98 Trailing earnings: $3.24 Current P/E: 9 P/E on near estimate: 12.5 Five-year est. annual growth rate: 9% Yield 4.20%

MCI Communications (Nasdaq: MCIC) $38

Market Cap: $26 billion 12-month sales: $18.5 billion Price-to-Sales Ratio (PSR): 1.4 Trailing net margins: 6.5% Earnings estimate: $1.71 for 12/97, 3 quarters out Far earnings estimate: $1.95 for 12/98 Trailing earnings: $1.73 Current P/E: 22 P/E on near estimate: 22 Five-year est. annual growth rate: 12% Yield 0.10%

Sprint Corp (NYSE: FON) $44

Market Cap: $18.4 billion 12-month sales: $14.2 billion Price-to-Sales Ratio (PSR): 1.4 Trailing net margins: 8.2% Earnings estimate: $2.49 for 12/97, 3 quarters out Far earnings estimate: $2.50 for 12/98 Trailing earnings: $2.70 Current P/E: 16 P/E on near estimate: 17.6 Five-year est. annual growth rate: 10% Yield 2.30%


TODAY'S NUMBERS
Stock Change Bid -------------------- AOL +1 1/4 44.00 T + 1/2 33.25 ATCT - 5/16 2.94 CHV +1 7/8 67.88 GM +2 1/8 57.38 IOM + 3/4 16.50 KLAC +2 7/8 45.25 LU +2 7/8 58.13 MMM + 1/2 86.88 COMS + 1/2 28.63
Day Month Year History FOOL +2.06% 2.19% -5.16% 153.11% S&P: +2.73% 4.88% 7.20% 73.22% NASDAQ: +2.10% 1.71% -3.75% 72.54% Rec'd # Security In At Now Change 5/17/95 980 Iomega Cor 2.52 16.50 554.76% 8/5/94 355 AmOnline 7.27 44.00 505.23% 8/11/95 125 Chevron 50.28 67.88 34.98% 8/12/96 110 Minn M&M 65.68 86.88 32.28% 10/1/96 42 LucentTech 47.62 58.13 22.07% 8/12/96 280 Gen'l Moto 51.97 57.38 10.39% 8/24/95 130 KLA Instrm 44.71 45.25 1.20% 8/12/96 130 AT&T 39.58 33.25 -15.99% 8/13/96 250 3Com Corp. 46.86 28.63 -38.91% 10/22/96 600 ATC Comm. 22.94 2.94 -87.19% Rec'd # Security In At Value Change 8/5/94 355 AmOnline 2581.87 15620.00 $13038.13 5/17/95 980 Iomega Cor 2594.53 16170.00 $13575.47 8/12/96 110 Minn M&M 7224.44 9556.25 $2331.81 8/11/95 125 Chevron 6285.61 8484.38 $2198.77 8/12/96 280 Gen'l Moto 14552.49 16065.00 $1512.51 10/1/96 42 LucentTech 1999.88 2441.25 $441.37 8/24/95 130 KLA Instrm 5812.49 5882.50 $70.01 8/12/96 130 AT&T 5145.11 4322.50 -$822.61 8/13/96 250 3Com Corp. 11714.99 7156.25 -$4558.74 10/22/96 600 ATC Comm. 13761.50 1762.50-$11999.00 CASH $39092.98 TOTAL $126553.60