AT&T (NYSE:T) is having a hard time delighting investors lately. The stock has gained just 6.5% over the last two years while the S&P 500 index soared 36% higher -- and that's after adjusting for AT&T's generous dividends.
Does that make AT&T a terrible investment for new money today, or is the stock simply spring-loaded with two years of unrealized value creation? Let's have a look.
The bull case
This stock is cheap. You can buy AT&T shares today for just 10.6 times trailing earnings. It's a low watermark compared to AT&T's own P/E history, and a bargain-basement valuation marker all around.
When fellow Fool Bret Kenwell recently highlighted two down-on-their-luck stocks due for a rebound from their disastrously low P/E ratios, both of these stocks still looked expensive next to AT&T.
In other words, Ma Bell's shares are priced for absolute disaster. Simply bouncing back to 15 times trailing earnings, where this stock used to trade in 2011, would unleash a 40% value boost.
And it's not like AT&T is sitting still.
Besides fighting to keep up with innovative billing strategies and a budding price war in the smartphone market, AT&T is looking to extend its business into brand new arenas. The pending buyout of satellite TV broadcaster DIRECTV (NASDAQ:DTV) would be a game-changer.
The DirecTV deal would not bolster AT&T's fledgling North American TV business, where the U-Verse IPTV service accounts for just 11% of AT&T's annual sales today. Moreover, DirecTV is big in Latin America, where AT&T doesn't have a serious business at all.
So if the powers that be decide to approve the DirecTV buyout, AT&T will be exploring huge new markets at home and abroad. If that doesn't unlock some of the bottled-up P/E compression, I don't know what will.
The bear case
Those innovative pricing strategies I mentioned earlier? They're real, and they pose an actual threat to AT&T's core business.
AT&T has a tendency to follow T-Mobile's lead, introducing features like family plan data sharing and subsidy-free installment plans several months after the smaller rival introduces them. In the meantime, T-Mobile chips away at the bigger carrier's massive user base.
The DirecTV deal would do nothing to stem this tide. Rather, it's time for AT&T to lead by example, clawing back price-sensitive subscribers from smaller and hungrier rivals. Unfortunately, that type of innovation doesn't exactly run in AT&T's veins.
As for the satellite deal's revolutionary impact, it's hardly a sure thing. Regulators may still block the deal, like they stopped AT&T from acquiring T-Mobile three years ago. If the FCC and the Department of Justice take anti-merger action again, the market-stretching benefits listed under the bull case will be off the table.
Bull vs. bear: who wins?
So there are arguments to be made on both sides of AT&T's value equation. But in this battle of bull versus bear, I'm afraid that the big paws will take down the longhorn.
It's true that AT&T shares look mighty tempting from a pure value perspective, and even more so with a 5.5% dividend yield sprinkled on top. If everything works out the way AT&T's management and shareholders hope, new money today should deliver fantastic long-term returns.
But, there are too many shadows over this sunny outlook.
I'm not at all convinced that regulators will allow the DirecTV deal to close, removing AT&T's best shot at significant sales growth for the foreseeable future. And like I said earlier, AT&T doesn't have a great track record when it comes to developing consumer-friendly sales strategies of its own.
In other words, I see a large risk of AT&T shares becoming dead money -- even at today's heavily discounted valuation. The FCC might prove me wrong by green-lighting the DirecTV acquisition, and that's why you won't find me actively betting against AT&T with short sales.
But the risk-reward ratio here doesn't speak in AT&T's favor.
So is it time to buy AT&T, just weeks before all the telecoms report their latest round of quarterly results and subscriber additions? Only if you truly expect the DirecTV merger to get the final go-ahead, and even then, the value is undermined by the brewing wireless price wars.
Or, in other words, there are plenty of better places to put your money today.