Did This Company Suggest Their Stock Is Too Expensive?

Chad is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

I've mentioned to several of my friends that after more than 20 years in the investment business, I can sometimes read between the lines and get to what companies really mean. When I look over earnings reports, sometimes there is a statement that might seem innocuous enough, but it almost jumps off the page because of its meaning. This is exactly what happened when I read over AT&T's (NYSE: T) earnings report. There were several positives, and a few negatives, but this one statement meant more than anything else.

The best commercials, but still finishing second
There is no doubt that the new AT&T commercials are a hit. Beck Bennett is the adult actor that talks with the kids, and I've caught many friends comparing which spot is the funniest. That being said, great commercials can only take you so far, and that's what AT&T is running into.

AT&T not only competes with Verizon (NYSE: VZ), but also with Sprint (NYSE: S), and local telecoms. like CenturyLink (NYSE: CTL) for customers. Whether it's right or wrong, AT&T is always going to be compared to Verizon when it comes to wireless performance. The two companies have all but locked up the industry, with Sprint and T-Mobile running a distant third and fourth.

When it comes to wireless, it's really simple actually, AT&T is doing better than Sprint, but worse than Verizon. If you look at analysts expectations for EPS growth, AT&T is expected to grow by 5.25%, which is better than the 5% at Sprint, but pales in comparison to the 9.25% growth at Verizon. If you look at current revenue growth, AT&T's wireless revenue increased 3.4%, which was better than Sprint at 1.75% growth, but worse than the 6.8% increase at Verizon.

In fact, while AT&T and Verizon were nearly neck and neck with churn rates of 1.04% and 1.01%, Sprint wasn't even in the same ballpark with a postpaid churn of 2.09%. However, if you look at Sprint's core subscriber additions (without Nextel), Sprint actually outperformed AT&T, with 356,000 net additions to 296,000 additions at AT&T. Once again, neither of these companies could keep up with Verizon's additions of 677,000.

Don't get me wrong, there are some positives
Though AT&T finished second to Verizon by nearly every measure in wireless, the company outperformed when it comes to their wireline results.

The wireline business is a race to try and replace losses in voice connections, with additions in high-speed Internet and video subscribers. Looking at high-speed Internet additions, AT&T reported impressive growth of 8.7%. By comparison, Sprint reported high-speed Internet losses, CenturyLink saw an increase of just 1.13%, and Verizon reported an increase of 3.36%. Clearly AT&T is winning business with their high-speed Internet offerings.

When it comes to video subscribers, the only peer that beat AT&T was CenturyLink, which reported an 11.67% increase in video customers. However, CenturyLink only has a few hundred thousand video subscribers, compared to 4.8 million at AT&T. Given AT&T's much larger base, the company's subscriber growth of 4.83% is impressive. In fact, AT&T beat Verizon's video growth of 3.45%, and beat Sprint, which saw losses in video subscribers.

There is just one problem
If AT&T were the second best wireless carrier, and had the best wireline performance, I could accept buying the stock. The problem is, the company basically said the shares are too expensive. The comment that nearly jumped off the page was, “The company expects to make future repurchase opportunistically, which will slow the pace of buybacks compared to recent activity.” In short, our stock used to be cheaper and was a good value so we bought a lot. However, the stock is up from its bottom and doesn't represent as good of a value, so we are going to wait for a lower price.

Though companies don't always have a great record with share buybacks, AT&T has almost 7% less outstanding shares today versus last year. If the company says it will “slow the pace” of buybacks, this means at the very least, the stock isn't as attractive as it once was. Tied to this statement, investors need to realize that AT&T's core operating cash flow (net income + depreciation) was up just 1.1% year-over-year. Compared to an increase of 0.5% at CenturyLink this looks okay, but Sprint reported a 5.73% increase, and Verizon grew operating cash flow by over 13%.

Investors in AT&T fall into two classes at this point. If you are a long-term holder of the stock, I would reinvest your dividends and hold on. I would not be too aggressive in adding to your position. If you are an investor considering buying AT&T, I would wait as the company apparently is for a better price. The stock has a nice yield at about 4.87%, but if the shares decline the yield will only go up. Consider adding T to your Watchlist on Fool.com to keep track of what's going on.

Chad Henage owns shares of Verizon Communications and CenturyLink. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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