AT&T (NYSE: T, 30-year-old Financials) stock appears to be fair valued, according to GuruFocus Value’s calculation. The GuruFocus Value is GuruFocus’s estimate of the fair value at which the stock is to trade. It is calculated based on the historical multiples at which the stock has traded, the company’s past growth, and analysts’ estimates of the company’s future performance. If a stock’s price is significantly above the GF value line, it is overvalued and its future performance may be poor. On the other hand, if it is significantly below the GF value line, its future return is likely to be higher. At its current price of $ 29.27 per share and market cap of $ 209 billion, AT&T stock appears to be priced correctly. The GF value for AT&T is shown in the table below.
Since AT&T is valued at its fair value, the long-term return on its stock will likely be close to the growth rate of its business.
Link: These companies can offer higher future returns with reduced risk.
Since investing in companies with poor financial strength could result in a permanent loss of capital, investors should carefully consider the financial strength of a company before deciding whether or not to buy shares. Examining the cash-to-debt ratio and interest coverage can provide a good initial perspective on the financial strength of the business. AT&T has a cash-to-debt ratio of 0.06, which is worse than 87% of companies in the telecommunications service industry. Based on this, GuruFocus ranks AT & T’s financial strength as 3 out of 10, suggesting a poor track record. Here is AT & T’s debt and cash flow for the past several years:
It is less risky to invest in profitable companies, especially those whose profitability is constant over the long term. A business with high profit margins is generally a safer investment than one with low profit margins. AT&T has been profitable 9 in the past 10 years. In the past twelve months, the company achieved sales of $ 172.9 billion and a loss of $ 0.35 per share. Its operating margin is 14.65%, which ranks better than 67% of companies in the telecommunications services industry. Overall, AT & T’s profitability is ranked 6 out of 10, indicating acceptable profitability. Here is AT & T’s revenue and net income for the past few years:
Growth is probably one of the most important factors in the valuation of a business. GuruFocus research has found that growth is closely tied to the long-term performance of a company’s stocks. If a company’s business is growing, the business typically creates value for its shareholders, especially if the growth is profitable. Likewise, if the income and profits of a business decrease, the value of the business will decrease. AT & T’s 3-year average revenue growth rate is worse than 67% of companies in the telecommunications service industry. AT & T’s 3-year average EBITDA growth rate is -7.5%, which is worse than 82% of companies in the telecommunications service industry.
Another way to determine a company’s profitability is to compare its return on invested capital to the weighted average cost of capital. Return on Invested Capital (ROIC) measures the extent to which a business generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company should pay on average to all its security holders to finance its assets. When the ROIC is higher than the WACC, it implies that the company creates value for the shareholders. In the past 12 months, AT & T’s return on invested capital is -4.48 and its cost of capital is 5.52. AT & T’s historical ROIC vs WACC comparison is shown below:
To conclude, the AT&T share (NYSE: T, 30 years Financials) gives all the indications of a fair valuation. The company’s financial situation is bad and its profitability is fair. Its growth ranks worse than 82% of companies in the telecommunication services sector. To learn more about AT&T stock, you can view its 30-year financial data here.
To find out about high-quality companies that can deliver above-average returns, please check out GuruFocus High Quality Low Capex Screener.