Last quarter, AT&T (T) posted a large loss of $6.7 billion or 35 cents per share after having to make benefit plan adjustments and cope with the collapse of the T-Mobile merger. Now, the stock trades at a deceivingly high P/E ratio of 45.4. Going forward, AT&T appears like it will be successful and I believe that now is the time to buy.
AT&T is expected to post an EPS of $2.36 in 2012 and $2.55 in 2013, giving the company a one year forward P/E of 12.72 and a 2 year forward P/E of 11.77. Despite these numbers not being market bests, it still signals a lot of upside potential. AT&T is cheap for an established business with a history of growth and profitability. T could easily trade around $35.50 in the next year, which would be an 18.25 percent return over a one year span.
One major concern that investors have with AT&T is that the company has become too big and any kind of growth will be stopped by the government. We have seen evidence of this in the Bell Divestiture and the failed acquisition of T-Mobile. It is true that AT&T can be defined as a mature company which is evident from its 5.86 percent dividend yield and its 108 percent payout ratio in 2011 (76.8 percent in its last 4 profitable quarters). However, there is still a lot of room for investors to receive value. AT&T will be able to leverage its size in the next few years to improve on margins and increase earnings with revenues growing relatively slower.
Telecommunications companies are faced with huge fixed costs and virtually no variable costs. As technology transforms even faster than we previously imagined, it makes sense to get behind the big players. Verizon Communications (VZ) is another good stock to hold in your portfolio, but I chose to write about AT&T mainly because it's a little more under priced right now.
In the next few years, high-speed internet will be available anywhere on any device and communication will become more seamless than ever. AT&T will be one of the leaders in laying down that infrastructure and reaping the profits of being a first entrant. AT&T still has not recovered from its big drop in the 2008 financial crisis, and now is the time to buy as the company will continue to dole out large dividends a be a leader in telecommunications.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
