AT case analysis

December 18, 2017 Management

To concentrate power and money further, both Verizon and AT&T serve more customers separately than the next two biggest companies (T-Mobile and Sprint) combined (Reardon). This has left AT&T with Verizon as its only real competition in telecommunications. Though there isn’t direct collusion between the two (as it would be illegal), these companies often proceed to engage in financial activities that indirectly push smaller companies out (Snyder). This has prompted a recent bid by Sprint to acquire T-Mobile, citing neither being competitively feasible against the two industry leading giants.

As of July 2014 the proposal is being sorted out in regulatory courts. So far, things are looking more promising than AT’s 2011 bid to acquire T-Mobile from Deutsche Telecoms where they eventually withdrew their bid due to significant consumer opposition and a bleak outlook of approval from the FCC. In recent years, AT&T has been diversifying its product offering in an attempt to move with market trends to where it sees the most potential future revenue. In particular, it has been investing a great deal more in paid TV subscriptions and video streaming with the I-I-verse service and their current acquisition of Direct is under review.

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Buying Direct marks a substantial widening in AT&T’s focus. The company is also focusing on initiatives like a partnership with GM to releases cars with built in internet connectivity (Change) and the Superpower program which is their high speed fiber-optic internet roll (Bantering). Internally, AT has had a good track record of corporate governance, with their own published guidelines outlining what it expects of its employees and overall corporate mission. They are guilty of massive overcompensation of leadership however.

Randall Stephenson, the CEO and board member, was compensated over $20 million in the middle of the recession in 2009 and has continued to receive over $20 million every year since. Though this is not far from some other major corporate Coo’s compensation, periods of scarcity require reductions from every member of the company. A company’s financial cannot be analyzed inside a bubble but instead should be put in the context of: 1) how similar competitors in the industry are faring and 2) a period of time instead of a point in time in order to determine the long-term trends.

First, we compared AT to its main competitors: Verizon, T-Mobile and Telephone and Data Systems (Sprint was dropped due to a combined balance sheet that muddled calculations). Despite this list representing the first, second, third and fifth largest wireless cellular service providers in the US, Verizon and AT capture exponentially more actual market share (Cheetah Sahara). It is also worth noting that Verizon’s financial are drastically different than previous years due to the $130 billion purchase of the remaining 45% of Verizon Wireless from Avoidance.

Both of these points show why an analysis over a period of time is more true to the position of the company since you can determine its approximate trajectory using trends from previous years. Regardless, we derived the ‘industry average’ benchmark from these four companies and can use it as long as we keep all of this in perspective. When we analyzed AT&T’s financial ratios, we noticed a slump in 2011. This slump can be primarily traced back to the failed acquisition of T-Mobile.

After devoting a large amount of time and resources to try to get it through, AT eventually was forced to withdraw its bid for T-Mobile, largely due to negative public opinion and bleak outlook in terms of the FCC regulatory decisions. This hurt AT not only in terms of wasted money, almost $4 billion of which still needed to be paid to T-Mobiles parent company Deutsche Telecoms (Worth), but also in decreased public confidence in the company’s decisions and lost opportunities from having so much tied up in the deal.

Overall AT&T was hit hard by the failed acquisition but has bounced back in the two years since. Financially, AT&T does not have very strong liquidity ratios. In fact, it has always been lagging behind the industry average in both the current and quick ratios, about lax less for both the 1. Xx and 1. Xx industry averages respectively. These averages are slightly inflated due to Verizon’s abnormal year last year though. In the years leading up to 2013, Verizon had liquidity ratios similar to AT’s. The most liquid AT&T has been in the last five years was during the failed merger.

In a different industry AT&T’s poor liquidity ratios could mean bad things, but AT has a large amount of fixed assets invested in existing infrastructure and not a large inventory to sell which makes things appear worse than they actually are. Overall, we do not believe AT’s liquidity ratios should be of too much concern. Jumping to AT&T’s market value ratios doesn’t show a promising side of the company either. The only ratio of real interest for AT&T here is the price/earnings ratio. In 2011, the year of the T-Mobile debacle, AT&T’s price/earnings ratio skyrocketed due to a huge drop in AT’s attributed net income.

Due to incurred expenses and other issues in 2011, AT&T’s earnings per share fell from $3. 35 to a mere $0. 66. By 2013, both the earnings per share and price/earnings ratio stabilized at a reasonable level. The stock price did not rise or fall significantly in this time, but has been on a slow upward trend which is at least positive amidst everything else. On a better note, AT has been able to maintain stable asset management ratios over the last five years throughout their merger problems and fluctuations in public opinion.

Though the lack of change is not exciting, it does show that AT has developed an efficient system, keeping most of these ratios around or better than the industry average. The company is mature enough to be able to reasonably accurately predict its asset needs. The only red herring is inventory turnover ratio, which fluctuates rather drastically without any real trend. AT has historically never had large inventories, so a small fluctuation in inventory could result in a large fluctuation in the inventory turnover ratio.

We believe this ratio is not important since it doesn’t reveal much about the company’s core business. By the end of 2013, AT was showing a 23. 7% operating margin, 14. 2% profit margin and a 20% return on equity, all considerably above the industry averages of 14. 8%, 6. 7% and 8. 9% respectively. All of the profitability ratios followed this trend. Strong profitability ratios are good indicators of a company’s prospects; they show the company will be able to put positive net income back into its own businesses.

This reduces risk, specifically the default risk premium, allowing them to borrow money at a lower rate. Taking advantage of these rates can help stock prices rise as investors continue to gain confidence in a company performing this way. Many investors use ROE (Profit Margin x Total Asset Turnover x Equity Multiplier) as a quick way to see how the company is doing. For AT&T, the Profit Margin has had the most influence on this calculation since both the Total Asset Turnover Ratio and Equity Multiplier do not vary much.

Specifically, a drastic decrease in Net Income in 2011 changed the Profit Margin and further changed the ROE. This downward spike was due in part to the failed acquisition of T-Mobile, but was also multiplied by factors such as the end of the exclusivity deal that AT&T had with Apple to carry the phone. Since 2011 however, AT&T has come out well on top of the industry, and importantly Verizon, in three of the five ratios. AT&T worked aggressively in 2012 and 2013 to diversify its product offerings and improve existing offerings.

A combination of reduced costs and increased income made this possible through investments such as the sale of their Advertising Solutions segment, increased revenues from I-I-verse residential customers, and primarily from growth in wireless data and equipment revenues. This wireless segment has seen tremendous gains with a big help from the end of AT&T’s unlimited mobile data plans as a new source of revenue. With AT’s positioning in these markets, revenues can only grow in the foreseeable future. Looking at AT&T as a company overall, it’s safe to say they are in a strong position.

They have been a major company in the American economy for the last hundred years and it does not look like it will change anytime soon given their market positioning and major infrastructural advantage. Even without expanding further, AT can continue to generate significant revenues off existing customers. This alone makes the company a secure investment for both bondholders and investors seeking stable dividends. On top of that, AT has been acquiring a number of companies in the last few years to improve their competitive advantages and product diversification: Atlantic Tell-network, Inc.

Leap Wireless International, spectrums in the 700 Much B band to broadcast cellophane signals, and the pending $67 billion acquisition of Direct. With Direct, AT will be able to expand into yet another fast growing market of on demand TV streaming, reaching over 20 million customers in the US and 18 million in Latin America instantly (You), only second to Compact’s 24 million (You). Despite increasing competition, AT&T is well defended against competitors in both existing wireless and hireling markets and its potential new markets. These conclusions are consistent with many other analysts’ positions.

Equity Watch, from the crowd sourced financial platform Seeking Alpha, also concludes that, “A solid dividend yield of 5. 20%, attractive share repurchase program, strong balance sheet and aggressive efforts to expand its LET coverage make T an impressive long term investment” (Equity Watch). Continuing with their optimization and expansion operations, AT will maintain its position on top of the telecommunications industry. References: “Cheetah Sahara: Technology & Strategy Consulting. ” Cheetah Sahara: Technology & Strategy Consulting. Cheetah Sahara Consulting, 2014. Web. 20 July 2014.


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