Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk. Â This isÂ best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another companyÂ or by reviewing theÂ 5 Most Undervalued Companies for the Defensive Investor – February 2015.Â By using theÂ ModernGraham methodÂ one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries. Â What follows is a specific look at how AT&T Inc. (T)Â fares in theÂ ModernGraham valuation model.
Company ProfileÂ (obtained fromÂ Google Finance):Â AT&T Inc. (AT&T) is a holding company. The Company is a provider of telecommunications services in the United States and worldwide. The Company services and products include wireless communications, local exchange services, long-distance services, data/broadband and Internet services, video services, telecommunications equipment, managed networking, wholesale services and directory advertising and publishing. AT&T operates in three segments such as Wireless, Wireline, and Other. The Companyâ€™s Wireless subsidiaries provide both wireless voice and data communications services across the United States, and through roaming agreements, in a substantial number of foreign countries. Wireline subsidiaries provide primarily landline voice and data communication services, AT&T U-verse high-speed broadband and voice services (U-verse) and managed networking to business customers. Its other segment includes customer information services (operator services) and corporate and other operations.
Defensive Investor – must pass at least 6 of the following 7 tests: Score = 5/7
- Adequate Size of Enterprise – market capitalization of at least $2 billion -Â PASS
- Sufficiently Strong Financial Condition – current ratio greater than 2 -Â FAIL
- Earnings Stability – positive earnings per share for at least 10 straight years -Â PASS
- Dividend Record – has paid a dividend for at least 10 straight years -Â PASS
- Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period -Â FAIL
- Moderate PEmg ratio – PEmg is less than 20 -Â PASS
- Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 -Â PASS
Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 2/5
- Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 -Â FAIL
- Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 -Â FAIL
- Earnings Stability – positive earnings per share for at least 5 years -Â PASS
- Dividend Record – currently pays a dividend -Â PASS
- Earnings growth – EPSmg greater than 5 years ago -Â FAIL
|Value Based on 3% Growth||$27.00|
|Value Based on 0% Growth||$15.83|
|Market Implied Growth Rate||5.04%|
|Net Current Asset Value (NCAV)||-$1.01|
Balance Sheet – DecemberÂ 2014
Earnings Per Share
Earnings Per ShareÂ – ModernGraham
AT&TÂ Inc.Â is not suitableÂ for the Enterprising Investor orÂ for the Defensive Investor. Â The Defensive Investor is concerned by the low current ratioÂ and theÂ insufficient earnings stability over the last ten years.Â The Enterprising InvestorÂ is concerned by the level of debt relative to the current assetsÂ and theÂ lack of earnings growth over the last five years. Â As a result, value investorsÂ following the ModernGraham approach based on Benjamin Graham’s methods should exploreÂ other opportunities at this time. Â From a valuation side of things,Â the company appears to be overvalued after seeingÂ its EPSmg (normalized earnings) drop from $2.48 in 2010 to $1.86 for 2014. Â This level of demonstrated growthÂ does not support theÂ market’s implied estimate of 5.04%Â earnings growth and leads the ModernGrahamÂ valuation model, based on Benjamin Graham’s formula, to return an estimate of intrinsic value belowÂ the price.
Be sure to check out previous ModernGraham valuations of AT&T Inc. (T)Â for greater perspective!
The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects. Â What do you think? Â What value would you put on AT&T Inc. (T)? Â Where do you see the company going in the future? Â Is there a company you like better? Â Leave aÂ comment on ourÂ Facebook pageÂ or mentionÂ @ModernGrahamÂ on Twitter to discuss.
Disclaimer: Â The author did not hold a position in AT&T Inc. (T)Â orÂ in any other company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours. Â Logo taken from Wikipedia for the sole purpose of identifying the company; this article is not affiliated with the company in any manner.