AT&T trades at $28.78 per share and has stayed right on track with the overall market, gaining 8% over the last six months. At the same time, the S&P 500 has returned 8.6%.
Is now the time to buy AT&T, or should you be careful about including it in your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.
Why Do We Think AT&T Will Underperform?
We're cautious about AT&T. Here are three reasons why T doesn't excite us and a stock we'd rather own.
1. Revenue Spiraling Downwards
A company’s long-term sales performance is one signal of its overall quality. Any business can put up a good quarter or two, but many enduring ones grow for years. AT&T’s demand was weak over the last five years as its sales fell at a 6.7% annual rate. This wasn’t a great result and is a sign of poor business quality.
2. EPS Trending Down
Analyzing the long-term change in earnings per share (EPS) shows whether a company's incremental sales were profitable – for example, revenue could be inflated through excessive spending on advertising and promotions.
Sadly for AT&T, its EPS declined by 9% annually over the last five years, more than its revenue. This tells us the company struggled because its fixed cost base made it difficult to adjust to shrinking demand.
3. Cash Flow Margin Set to Decline
Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
Over the next year, analysts predict AT&T’s cash conversion will fall. Their consensus estimates imply its free cash flow margin of 15.8% for the last 12 months will decrease to 13.7%.
Final Judgment
We see the value of companies helping consumers, but in the case of AT&T, we’re out. That said, the stock currently trades at 13.2× forward P/E (or $28.78 per share). This valuation is reasonable, but the company’s shaky fundamentals present too much downside risk. There are better stocks to buy right now. We’d recommend looking at one of our all-time favorite software stocks.
Stocks We Like More Than AT&T
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