U.S. telecom company AT&T (T 0.18%) might be the latest example of a stock that seems like it can't go much lower -- shares of the company trade for roughly $14 each, their lowest price since the mid-1990s.
But there must be a bottom. After all, AT&T is the leading wireless carrier in the United States, and the company is doing some positive things in its core wireless business.
Let's do the dirty work and crunch the numbers to determine whether this stock is finally ripe for investors or if it's nothing but a falling knife.
Are AT&T shares as cheap as they look?
Share prices are the signal investors instinctively look to when determining whether a stock is cheap; it's what you see when you fire up your trading app or turn on the financial news. But share prices are only what the market wants to pay for that stock at that moment, and they don't necessarily reflect the actual value of the stock.
Determining the actual value is more difficult, especially because AT&T's numbers tell an odd story. The stock trades at a tremendous discount to the broader stock market. While the average S&P 500 stock trades at a price-to-earnings ratio (P/E) of around 21, AT&T's P/E is just 6. And the market historically averages roughly 10% annual growth over the long term, while analysts expect AT&T to grow earnings by just 3.3% annually over the coming years.
A stock should probably trade at a lower valuation if it's not growing as fast as the broader market. This shows up in the stock's price/earnings-to-growth, or PEG, ratio. At a ratio of 1.7, AT&T's valuation isn't expensive, but it's not a bargain either. Indeed, it's not the jaw-dropping deal a multi-decade-low share price would have you believe it would be, especially when you factor in AT&T's poor growth.
Investor sentiment could stay negative for a while
AT&T's slow growth isn't the only problem plaguing the company. Its balance sheet continues to shoulder a heavy debt load related, in part, to borrowing that funded massive entertainment acquisitions during the 2010s. These assets have since been sold off, but their debt burden remains and continues to cost AT&T billions in annual interest expenses. Interest takes away from bottom-line profits, so one could say that debt is smothering the company's profits.
T Total Long Term Debt (Quarterly) data by YCharts
Additionally, rumblings have emerged over lead-coated cables that remain buried in the environment, and the potential harm they could cause. The U.S. Department of Justice and Environmental Protection Agency are reportedly monitoring the situation after a report by The Wall Street Journal drew attention to the issue in early July. According to court documents, AT&T could have 200,000 miles of lead cables in its network. While it's far too soon to assess how big of a liability this might be for AT&T and other telecom companies, there is a non-zero chance that this will turn into an expense for the company, either through potential fines or eventual litigation.
Is AT&T stock a buy?
A low valuation by itself doesn't justify buying a stock. There must be some fundamentals to support purchasing the stock, some meat on the bones -- otherwise, you'll probably learn that some stocks are cheap for a reason. So which category does AT&T fit into?
Looking back at AT&T's price over the past decade, it seems that the company's heavy debt load has weighed on its standing with Wall Street. Unfortunately, that hasn't changed enough yet to get too excited. Additionally, there is now a risk of litigation associated with the stock. Litigation can have many outcomes, but it's typically not good. It just adds more uncertainty to the equation.
Sure, AT&T famously pays a hefty dividend that yields nearly 8% today. That and even modest growth could deliver potential double-digit investment returns, something I've pointed out in the past. However, the litigation concerns could leave one wanting more upside out of a potential investment, and the company doesn't seem ready to deliver it.
