Value Analysis of AT&T Every Investor Should Read

AT&T (T) stock climbed 1.0 % this afternoon. According to our metrics, the company seems overvalued at today's prices. In the below analysis, we will put AT&T's valuation in the context of its poor growth indicators and mixed market sentiment, which are also strong drivers for share price.

AT&T Inc. provides telecommunications and technology services worldwide. The large-cap Telecommunications company is based in Dallas, United States and has 157,790 full time employees.

T Has a Higher P/E Ratio Than the Sector Average

Compared to the Telecommunications sector's average of 18.85, AT&T has a trailing twelve month price to earnings (P/E) ratio of -13.2 and an expected P/E ratio of 6.3. The P/E ratios are calculated by dividing the company's share price by its trailing 12 month of $-1.18 or forward earnings per share of $2.47.

Earnings represent the net profits left over after subtracting costs of goods sold, taxes, and operating costs from the company's recorded sales revenue. One way of looking at the P/E ratio is that it represents how much investors are willing to pay for every dollar's worth of the company's earnings. Since AT&T's P/E ratio is higher than its sector average of 18.85, we can deduce that the market is overvaluing the company's earnings.

AT&T Has a Positive Rate of Expected Growth

P/E ratios are limited because they don't tell us how the market is valuing the company's expected earnings growth. One way to solve this problem is to divide the current price to earnings ratio by the company's expected growth rate, which results in the price to eanrings growth, or PEG, ratio. AT&T has a negative PEG ratio of -9.97, and since the company's earnings per share are negative, we can deduce that the expected growth rate is positive. While a negative PEG ratio is never a good sign, investors may fin solace in the positive growth expectations.

T Has an Average P/B Ratio

Traditionally, stock pickers used to focus primarily on finding issues that were trading significantly below their tangible asset value, to guarantee themselves a margin of safety. But such an approach would screen out many valuable securities because many profitable businesses -- especially those that heavily leverage information technology -- simply do not have many tangible assets compared to more capital intensive companies.

Therefore, modern value investors tend to focus less on absolute price to book value (P/B) ratios. Instead of singling out stocks with a P/B ratio of less than 1, they will compare the target company against its peer group. For AT&T, the P/B value is 1.12 while the average for the Telecommunications sector is 3.12.

T's Weak Cash Flow Generation Is Troubling

The table below shows that AT&T is not generating enough cash. A well run company will generally have cash flows that reflect the strength of its underlying business, and in AT&T's case, free cash flow is growing at an average rate of -19.3% with a coefficient of variability of 32.4%. We can also see that cash flows from operations are evolving at a -9.9% rate, versus 0.2%:

AT&T's Margins Are Strong

If you buy a stock for the long run, you want the underlying business model to be profitable. Gross margins tell you how much profit the company generates compared to the cost of revenue, which is the cost directly related to providing AT&T's goods and services. Operating margins, on the other hand, tell you how much of these profits the company keeps after you take overhead into account.

AT&T's Gross Margins

AT&T's Operating Margins

AT&T's cost of revenue is growing at a rate of -11.8% in contrast to -8.7% for operating expenses. Sales revenues, on the other hand, have experienced a -9.6% growth rate. As a result, the average gross margins growth is 2.0 and the average operating margins growth rate is 4.0, with coefficients of variability of 4.3% and 10.6% respectively.

AT&T Benefits From Positive Market Signals

The market sentiment regarding AT&T is overwhelmingly positive. The stock has an average rating of buy and target prices ranging from $25.0 to $9.0. T is trading -23.4% away from its target price of $20.37. 1.3% of the company's shares are tied to short positions, and 55.6% of the shares are held by institutional investors.