Is AT&T Stock a Buy Now Option?
US telecommunications company AT&T ( NYSE:T ) may be the latest example of a stock that looks like it can't go much lower -- the company's shares are trading at around $14 apiece, their lowest price since the mid-1990s.
But there has to be a bottom. After all, AT&T is the leading wireless carrier in the United States, and the company is doing some positive things in its core wireless business. Let's do the dirty work and crunch the numbers to see if this stock is finally ripe for investors, or if it's nothing more than a falling knife.
Is AT&T stock as cheap as it looks?
Stock prices are the signal that investors instinctively look to when determining whether a stock is cheap; it's what you see when you launch your trading app or turn on financial news. However, stock prices are only what the market is willing to pay for that stock at any given time and do not necessarily reflect the stock's true value.
Determining the true value is more difficult, especially since AT&T's numbers tell a strange story. The stock trades at a huge discount to the broader stock market. While the average S&P 500 stock trades at a price-to-earnings (P/E) ratio of around 21, AT&T's P/E is just 6. And the market has historically averaged roughly 10% annual growth over the long term, while analysts expect AT&T to grow earnings in the coming years by only 3.3% per year.
The stock should probably trade at a lower valuation if it isn't growing as fast as the broader market. This is reflected in the price/earnings to growth ratio, or PEG. At a ratio of 1.7, AT&T's valuation isn't expensive, but it's not a bargain either. It's actually not such a mind-blowing deal that you'd believe the stock price would be low in a few decades, especially when you factor in AT&T's lackluster growth.
Investor sentiment could remain negative for a while
AT&T's slow growth isn't the only problem plaguing the company. Its balance sheet continues to carry a heavy debt burden, in part related to loans that financed massive entertainment industry acquisitions during 2010. Those assets have since been sold, but their debt burden remains and continues to cost AT&T billions in annual interest costs. Interest takes away from the bottom line, so you could say that debt is choking the company's profits.
In addition, there was rumbling over the lead-coated cables that remain buried in the environment and the potential damage they could cause. The U.S. Department of Justice and the Environmental Protection Agency are said to be monitoring the situation after a report by The Wall Street Journal in early July highlighted the issue. According to court documents, AT&T could have 200,000 miles of lead wire in its network. While it's still too early to gauge how much of a liability this might be for AT&T and other telcos, there's a non-zero chance it could turn into an expense for the company, either through potential fines or potential litigation.
Is AT&T stock a buy?
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A low valuation alone does not justify buying a stock. There has to be some fundamentals to support buying a stock, some meat on the bone - otherwise you'll probably find that some stocks are cheap for a reason. So what category does AT&T fit into?
Looking back at AT&T's price over the past decade, the company's high debt load appears to have weighed on its standing on Wall Street. Unfortunately, it hasn't changed enough to get too excited yet. In addition, there is now the risk of lawsuits associated with the shares. Litigation can have many outcomes, but they are usually not good. It just adds more uncertainty to the equation.
Sure, AT&T pays a hefty dividend, yielding nearly 8% today. This, and even modest growth, could yield potential double-digit investment returns, as I have pointed out in the past. However, concerns about lawsuits could leave one wanting more upside from a potential investment, and the company doesn't seem ready to deliver.
When our team of analysts has a stock tip, it can pay to listen. After all, the newsletter they've been running for over a decade, the Motley Fool Stock Advisor, has tripled the market.*They just revealed what they believe are the ten best stocks for investors to buy right now... and AT&T wasn't one of them! That's right - he thinks these 10 stocks are an even better buy.
Justin Pope has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. In addition, there was rumbling over the lead-coated cables that remain buried in the environment and the potential damage they could cause. The U.S. Department of Justice and the Environmental Protection Agency are said to be monitoring the situation after a report by The Wall Street Journal in early July highlighted the issue. According to court documents, AT&T could have 200,000 miles of lead wire in its network. While it's still too early to gauge how much of a liability this might be for AT&T and other telcos, there's a non-zero chance it could turn into an expense for the company, either through potential fines or potential litigation.
Is AT&T stock a buy?
A low valuation alone does not justify buying a stock. There has to be some fundamentals to support buying a stock, some meat on the bone - otherwise you'll probably find that some stocks are cheap for a reason. So what category does AT&T fit into?
Looking back at AT&T's price over the past decade, the company's high debt load appears to have weighed on its standing on Wall Street. Unfortunately, it hasn't changed enough to get too excited yet. In addition, there is now the risk of lawsuits associated with the shares. Litigation can have many outcomes, but they are usually not good. It just adds more uncertainty to the equation.
Sure, AT&T pays a hefty dividend, yielding nearly 8% today. This, and even modest growth, could yield potential double-digit investment returns, as I have pointed out in the past. However, the fear of lawsuits could lead to one wanting more upside from a potential investment, and the company doesn't seem ready to deliver.When our team of analysts has a stock tip, it can pay to listen. After all, the newsletter they've been running for over a decade, the Motley Fool Stock Advisor, has tripled the market.*
They just revealed what they believe are the ten best stocks for investors to buy right now... and AT&T wasn't one of them! That's right - he thinks these 10 stocks are an even better buy.Justin Pope has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy
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