The launch of the Apple iPhone precipitated an avalanche of commentary, almost all glowing but for the fact that Apple had chosen Cingular as an exclusive service provider partner. We were thinking along the same lines at the time. But then a little voice started reminding us that maybe we can make more money by thinking the other way.
Visualizing a revitalized AT&T piqued our interest. At the time AT&T was trading at less than 5x operating cash flow. Although we are not expert investors in communication service providers, in the past buying similar companies at such a multiple (like Telecom Italia back in the â€™90 s) has paid off well. Since then T has done well and was the top performer in the Dow for Q1. Developing fundamentals hint that there may be a larger story here.
First of all the iPhone may indeed be a catalyst for the company in terms of visibility and investor sentiment. Itâ€™s becoming clear that the pull of having the coveted iPhone is more powerful than the objections to AT&T as a service provider. While the business may not move the needle in terms of the overall revenue it should be a strong win for AT&T in terms of acquiring new customers.
What about the rest of AT&T? In combination with BellSouth and Cingular itâ€™s over a $100B business that will need way more than the iPhone to drive. AT&T has been doing pretty badly the last couple of years making for easier comparisons and perceived improvements. At least a few things have been going right for AT&T including their IPTV offering, which is accelerating rapidly after a false start in 2006. The enterprise sector is at least healthy enough for them to execute an orderly consolidation plan. Lastly the company has plenty of opportunity to improve cash flow and dividends as efficiencies are driven by the combined organization. When one imagines the cost structures of AT&T/SBC/Cingular it conjures up pictures of some low-hanging fruit to start picking.
I short we see the company improving operational results across the bulk of their businesses and growing the desirable segments of wireless, broadband and data much faster than the rest of the company. As a major Dow component AT&T wonâ€™t wildly outperform the market but at these levels it still looks too cheap on both an absolute and relative basis. Compared to GE, Cisco and Verizon the shares should be 20% higher and if the stock gets afforded a better multiple (say a 15x PE on 2008), the shares could certainly trade in the $45-47 range.Â — Kris Tuttle