Is it Time to Hang Up on AT&T?
by Tony Daltorio, Investment U Research
Thursday, July 22, 2010
AT&T (NYSE: T) and its shareholders have it pretty rough these days. With shares down about 12% since January, the future does not look bright.
The company did enjoy acquisition-fueled growth over much of the past decade. But revenue fell last year and it expects only flat sales of $123 billion for 2010.
Added to its list of woes, AT&T won’t be able to count on its exclusive contract with Apple (Nasdaq: AAPL) for much longer. Since its debut in 2007, consumers who buy the iPhone have had to accept AT&T with it.
That deal sent the network’s revenues up 43% since then, and subscriber figures up 40%. As for profits? They’re up 200%.
But, within the year, Verizon (NYSE: VZ) will have its shot at those customers. And considering its popularity – it’s the largest U.S. mobile operator – it could woo many of them away.
Then again, Verizon might not need the iPhone and all of the headaches associated with it. Regular AT&T customers have complained about how the bandwidth-hungry device overwhelms the network, leaving some of them unable to call.
AT&T responded by spending $37 billion since the iPhone’s launch to fix the problem. And it plans to pay an extra $13.5 billion total this year on new equipment and capacity.
Worse yet, AT&T has several other problems that it seems incapable – or unwilling – to shake.
AT&T Lagging Behind on 4G Technology
Somebody might want to tell AT&T that the 4G network is the next big thing.
Currently, it’s lagging behind the competition for the technology, which enables very fast web browsing on smartphones.
Verizon has already begun its own 4G network, using a wireless technology called Long Term Evolution or LTE. It enhances such applications as games, interactive TV and mobile video blogging. And it allows customers to remain connected through any access technology – whether WiFi or WiMAX – wherever they are.
AT&T, however, won’t offer LTE services until next year. And even then, it will likely limit such services to data cards that allow laptops to go wireless.
Fortunately, it does have one thing going for it. Recently, it became the first mobile operator to scrap its all inclusive data plan for smartphones.
That move won’t make iPhone customers happy. But it should please shareholders, as it ramps up revenue.
More Bad News for AT&T
What investors don’t like is the revenue decline at the company’s fixed line unit. AT&T’s high-speed, fixed-line, broadband network just hasn’t fixed that problem.
Also, for the past four years, it has used its fiber optic-based network to supply TV services. But that hasn’t really worked out either.
It currently has a mere 2.3 million customers for its U-verse television service. And by 2011, it will only be capable of reaching a third of U.S. homes.
Comcast (Nasdaq: CMCSA), on the other hand, has 24 million customers. And Verizon has met impressive success with its FIOS service.
To stay apace, AT&T wants to buy up satellite TV provider DirecTV (Nasdaq: DTV). It points to an “industrial logic” in doing so, but believes the FCC won’t allow it to. So instead, it has declared its intentions to look into overseas companies, probably within emerging markets.
But if it wants to do that, it’s once again late to the party. The mobile phone business in most emerging markets has become ultra competitive. And profit margins in those markets are dropping.
Hanging-Up on AT&T
Despite all of that, AT&T insists it can notch up its annual earnings growth of near 10%. It believes it can achieve this growth if it can increase underlying revenue growth of 3-5%.
- Maybe it can. After all, it does generate a large amount of cash and offers a healthy dividend.
- But then again, maybe it can’t, since services are rapidly becoming commoditized.
It looks as if the FCC is pressing ahead with wide-ranging new rules for broadband service providers. Those rules could result in regulated pricing across the industry. And AT&T especially worries that the FCC could bar it from buying more radio spectrum.
In short, it looks very likely that the company won’t be going far anytime soon.
Investors should hang up on AT&T while they still can.
Good investing,
Tony Daltorio
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