Valuation of AT&T

1. AT&T
Investment Research Report

2. •
•
•
•
•
Company Description
Industry Analysis
Competitive Analysis
Risks and SWOT Analysis
Valuation

3. Company Description
• A Fortune 500, American multinational
telecommunications corporation, headquartered in
Dallas, Texas
• Largest provider of fixed & mobile telephony in
US
• Traces origin from Bell Telephone Company,
which invented telephone
• In 1984, forced to divest into baby companies,
which later on added competition for AT&T.
Verizon being one of them

4. AT&T Operating Segments
O
O
O
Wireless
Wireless voice and data communication
services, local wireless communications and
roaming services. Generated over 53% of
company’s total revenues
Wireline
Internet access and network integration, Uverse services, business voice applications
over IP-based networks. Contributes to 28%
of total revenues
Other
AT&T’s international equity investments, a
47% equity interest in YP Holdings, and
other corporate-driven activities and
operations.
AT&T Revenue Breakdown
Other
19%
Wireless
53%
Wireline
28%

5. Industry Analysis
O US wireless is a $200bn industry, with 300mn
O
O
O
O
subscribers
Saturation in voice call segment
Data and Video new prime focus
Estimates indicate data and video to account
for 60% of network traffic by end of 2013
Stable near term future based on steady
economic recovery

6. The Road Ahead
O Severe spectrum shortages, forcing companies to
expand existing portfolios
O Tighter FCC regulations would limit growth in
domestic market
O AT&T actively looking for expansion in subdeveloped European and Latin American markets,
making use of reduced cost of borrowing
O AT&T has also signed a contract with FON to provide
cheaper Wi-Fi access to its customers travelling
abroad

7. Competition
O Technology
O Economy
O Comparable Alternatives
O Pricing
O Regulation

8. Competition
Direct Competitor Comparison
T
S
PVT1
VZ
Industry
Market Cap:
185.28B
27.77B
N/A
143.66B
769.74M
Employees:
246,740
39,000
34,5181
178,300
1.63K
0.02
-0.01
N/A
0.04
0.03
128.17B
35.36B
19.16B1
119.53B
633.04M
0.56
0.42
N/A
0.62
0.62
28.44B
5.24B
N/A
34.08B
251.58M
0.10
0.02
N/A
0.15
0.18
7.48B
-3.30B
N/A
2.20B
N/A
1.37
-1.09
N/A
0.77
0.77
25.75
N/A
N/A
65.36
25.02
2.19
N/A
N/A
1.75
10.21
1.44
0.78
N/A
1.20
1.22
Qtrly Rev Growth
(yoy):
Revenue (ttm):
Gross Margin
(ttm):
EBITDA (ttm):
Operating Margin
(ttm):
Net Income (ttm):
EPS (ttm):
P/E (ttm):
PEG (5 yr
expected):
P/S (ttm):
S = Sprint Corporation
Pvt1 = T-Mobile USA, Inc. (privately held)
VZ = Verizon Communications Inc.
Industry = Telecom Services - Domestic
1
= As of 2011

9. Porter’s Analysis
O Rivalry
O
O
O
Churn Rate
Average Revenue Per User (ARPU)
Lack of “Good” Spectrum
O Threat of Substitutes
O
O
Cable TV and Satellite Providers
The Internet
O Buyer Power
O
O
Telephone and Data Services are a commodity
Low Switching Costs
O Supplier Power
O
O
Plenty Vendors
Limited Pool of Talent
O Barriers to Entry
O
O
O
High Fixed Costs
Federal Communications Commission (FCC)
Lack of “Good” Spectrum

10. Risks
Business risks
 Strategic risk
 Operational risk
 Compliance risk
Market risks
 Interest rate risk
 Foreign exchange rate risk

11. Interest rate risk
 Financial instruments held
 Manage interest expense
 Hedge

12. Foreign exchange rate risk
 Equity investments in foreign countries
 Use of cross currency swaps to hedge.

13. Few risk factors
 Worsening of US economy
 Adverse changes in interest rates.
 Adverse changes in global financial
markets.

14. SWOT Analysis
Strengths
a) Brand recognition
b) Experienced
management
c) Robust financials
Weakness
a) Competitive segment
b) Union workers
c) Pension liability
Opportunities
a) New technology
b) Mobile apps
c) I-phone I-pad deals
Threats
a) Getting new spectrum
b) Competitors and
consolidation
c) Saturation and
slowdown

15. Valuation
 Dividend Discount Model
 Free Cash Flow to Firm
 Free Cash Flow to Equity

16. Dividend Discount Model
Used the following parameters:
 Since AT&T is in the mature growth stage,
we calculated the required rate of return
using the implied growth rate, 2.26%
 Assumed risk-free rate at 2.53%
 Terminal value calculations based on
future values of dividends
 Forecast: $34.47 - $36.86

17. FCFF and FCFE
 Debt ratio: 43%
 E(r) is 7.63%
 WACC: 5.87%
 Single stage model
 FCFF value: $39.59
 FCFE value: $34.75

18. Recommendation – Buy Buy
Buy
 With recent acquisitions in progress, AT&T
share price could exceed estimation
 Continuously increasing dividends
 Current Price: $35.72
 Targeted range: $34.75 - $39.59