AT&T Inc (T, Financial) recently showcased a daily gain of 3.36%, coupled with a notable 3-month gain of 21.34%. Despite these positive signs, the company reported a Loss Per Share of $1.54. Investors are often faced with the question: Is the stock modestly overvalued? To address this concern, a detailed valuation analysis is crucial. We invite you to delve into the following comprehensive examination to understand AT&T's market position and intrinsic value.
Company Introduction
AT&T Inc (T, Financial) is a telecommunications giant, with its wireless business constituting approximately two-thirds of its revenue after the spinoff of Warner Media. As the third-largest U.S. wireless carrier, AT&T connects 70 million postpaid and 18 million prepaid phone customers. The company's fixed-line enterprise services, accounting for around 18% of revenue, include a vast array of offerings from internet access to wholesale network capacity. Residential services contribute about 11% of revenue, mainly through broadband internet service. AT&T also has a significant presence in Mexico, catering to 22 million customers, albeit representing a mere 3% of revenue. Despite holding a 70% equity stake in DirecTV, AT&T does not consolidate this business within its financial statements.
To set the stage for an in-depth valuation, we compare AT&T's current stock price with the GF Value, an estimate of the stock's fair value. This comparison will serve as the foundation for our exploration of AT&T's true market value.
Summarize GF Value
The GF Value is a proprietary measure of intrinsic value, incorporating historical trading multiples, a GuruFocus adjustment factor based on past performance and growth, and future business performance estimates. The GF Value Line suggests the fair trading value for the stock. When a stock's price significantly exceeds the GF Value Line, it may be overvalued, indicating potential poor future returns. Conversely, a price well below the GF Value Line could signal undervaluation and the prospect of higher future returns.
Currently, AT&T (T, Financial) appears modestly overvalued according to the GF Value, with a stock price of $17.22 per share against a GF Value of $15.39. This assessment suggests that the long-term return on AT&T's stock might be lower than the company's business growth trajectory.
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Financial Strength
Investors must assess a company's financial strength before purchasing its stock. Companies with weak financials pose a higher risk of permanent loss. The cash-to-debt ratio and interest coverage are critical indicators of financial health. AT&T's cash-to-debt ratio stands at 0.05, which is lower than 86.04% of its peers in the Telecommunication Services industry. With an overall financial strength rating of 4 out of 10, AT&T's financial condition is considered poor.
Profitability and Growth
Investing in profitable companies, particularly those with consistent long-term profitability, tends to be less risky. Companies with high profit margins usually offer safer investment opportunities than those with low margins. AT&T has been profitable 8 out of the past 10 years. In the last twelve months, the company reported a revenue of $121.70 billion and a Loss Per Share of $1.54. Its operating margin stands at 20.09%, ranking better than 78.41% of the industry. GuruFocus assigns AT&T a profitability rank of 7 out of 10, indicating fair profitability.
Growth is a pivotal factor in a company's valuation. Research by GuruFocus suggests that growth is closely correlated with long-term stock performance. A company that grows rapidly creates more value for shareholders, especially if the growth is profitable. However, AT&T's 3-year average annual revenue growth rate of -13.6% ranks lower than 89.07% of its industry peers. Similarly, the 3-year average EBITDA growth rate of -28.2% falls below 92.12% of competitors in the Telecommunication Services industry.
ROIC vs. WACC
Assessing a company's profitability can also be done by comparing its Return on Invested Capital (ROIC) to the Weighted Average Cost of Capital (WACC). ROIC measures the efficiency of cash flow generation relative to capital investment, while WACC represents the average rate a company pays to finance its assets. Ideally, ROIC should exceed WACC. For the past 12 months, AT&T's ROIC was 10.01%, and its WACC was 5.58%.
Conclusion
In summary, AT&T (T, Financial) seems to be modestly overvalued. The company's financial condition is poor, but its profitability is considered fair. Its growth ranks unfavorably when compared to 92.12% of companies in the Telecommunication Services industry. For a more detailed insight into AT&T's financials, you can view its 30-Year Financials here.
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This article, generated by GuruFocus, is designed to provide general insights and is not tailored financial advice. Our commentary is rooted in historical data and analyst projections, utilizing an impartial methodology, and is not intended to serve as specific investment guidance. It does not formulate a recommendation to purchase or divest any stock and does not consider individual investment objectives or financial circumstances. Our objective is to deliver long-term, fundamental data-driven analysis. Be aware that our analysis might not incorporate the most recent, price-sensitive company announcements or qualitative information. GuruFocus holds no position in the stocks mentioned herein.
