(MONEY Magazine) – Why AT&T may be worth more than you think

Wall Street slammed AT&T (T) after CEO Michael Armstrong said he wanted to chop the troubled telco into four stocks. Shares plunged to a three-year low of $22, and AT&T's market cap fell below $100 billion. Analysts zeroed in on abysmal growth prospects in long distance. Many called the dicing of AT&T into a cable company, a wireless company and a telecom-services company (with a tracking stock for domestic long distance) cosmetic at best. Salomon Smith Barney's Jack Grubman, the Street's most feared telecom analyst, downgraded AT&T to a hold. "The restructuring," he warns, "is going to take the better part of two years."

Yet shareholders of AT&T own an 85% chunk of AT&T Wireless (AWE), which already trades as a tracking stock. That stake has a market value of $45 billion, or about half of AT&T's total worth. So, in effect, you're getting AT&T's other businesses for a bargain $11 a share. That includes a cable company whose competitors' stocks fetch up to eight times their sales. And, oh yes, the traditional phone business, which has to be worth something. That's why Oakmark manager Bill Nygren bought 1.4 million shares in the third quarter. And it's why Tim Horan of CIBC World Markets looked afresh at the company after the breakup announcement. He valued the whole shebang at $36, which led him to do something he'd never done: rate AT&T a buy. --ALEC APPELBAUM

Give me Liberty

One investor who must be pleased with the AT&T breakup is John Malone, the cable mogul and board member who has lobbied for a separate cable stock since he sold his TCI empire to AT&T in 1998. But while Malone awaits the new stock, he has another downer to deal with: Liberty Media Group (LMG.A). The holding company has stakes in communications businesses (including a 9% chunk of MONEY parent Time Warner) and became a tracking stock of AT&T after Malone sold out to Ma Bell. Liberty sank this summer after several holdings cratered, including Priceline.com and phone company ICG Communications. It touched $14.75 in October from a spring peak of $30, and that's just too cheap, says Mark Greenberg, who counts Liberty as roughly 5% of his Invesco Leisure Fund. Greenberg argues that Liberty's stakes in Japanese cable and stock investments in bigger companies are way underpriced. Merrill Lynch cable analyst Jessica Reif Cohen agrees. She expects Liberty to reach $30 to $35 within a year. --A.A.

Snack attack at Kellogg

The soggy U.S. cereal market has crunched the stock of Kellogg (K). At $26, shares are down 29% from the 52-week high, despite the market's recent taste for defensive fare like food stocks. But Kellogg has just agreed to buy snack-food maker Keebler (KBL) for $42 a share. Can the elves really spice things up?

Not for some time. While Keebler makes such brands as Cheez-It crackers and Famous Amos cookies, and brings respected managers plus its own distribution system (instead of the middlemen Kellogg relies on), the deal will produce crumbs in the short term. Bottom-line performance at Kellogg will likely go from bad to worse. Before the deal, earnings were to grow just 6% in 2001; by gobbling Keebler, Kellogg takes on more than $600 million in debt and associated costs that should cut profits by 20% next year. "Earnings are going to be squeezed through 2003," says analyst Richard Joy of Standard & Poor's. --ADRIENNE CARTER

A yield sign

Thought the stock market was nuts? Have you noticed the bond market standing on its head? Short-term bonds usually pay out less than long-term bonds (because they're less risky), but in early November, 30-year Treasuries were yielding only 5.8% compared with 6.4% for risk-free three-month T-bills. That means the yield curve--a plot of yields and maturities--is a mirror image of its normal upward slope; in economics parlance, it's "inverted."

Conventional wisdom says this portends a recession. When investors sniff a slowdown, they also anticipate interest-rate cuts to jump-start the economy. And that fuels demand for long-term bonds that lock in the current higher rates. Rising long-term-bond prices mean lower long-term yields, and there you have it: an inverted yield curve.

As the stock market has made painfully clear, the economy is slowing, thanks to Alan Greenspan's hikes of short-term interest rates--one cause of this latest yield bender. But are things so bad that the Fed may actually cut rates? Not soon, bets Pimco bond guru Paul McCulley. "I think Greenspan will sit on his hands as long as possible; he doesn't want to revive 'irrational exuberance.'"

At any rate, economic data suggest that a recession is a distant threat. The third quarter saw the slowest U.S. economic growth in more than a year, but consumer spending is still strong, one sign that inflation (usually the polar opposite of recession) still lurks.

So why is the yield curve inverted? The government's decision to retire some long-term Treasury debt may have created get-it-while-you-can demand. A series of bad-earnings shocks have rocked the stock market; then there's Middle East unrest and rising energy prices. Just one thing is clear: Investors consider bonds a refuge. In fact, Lehman's main bond index is up 7.8% through Oct. 31. Gloats McCulley: "Bond managers are getting the respect they deserve." --LAURA LALLOS

An excellent stock in search of heat

Home heating-oil prices are already up 35% this year, and the dead of winter is still weeks away. If you're looking to play this angle, you might consider Sunoco (SUN). The leading refiner of home heating oil in the Northeast, Sunoco has been awash in profits the first nine months of 2000, its earnings soaring 900% to $3.45 a share. But go figure: Rising oil prices have benefited Sunoco's bottom line more than its stock price. It trades at a modest eight times earnings vs. 14 for Texaco and 21 for ExxonMobil. Throw in the 3.3% dividend yield (based on the Nov. 1 share price of $30), and you've got an inexpensive stock with a nice upside if there's a cold winter in the Northeast. --JON BIRGER

Quite a liquid asset

Jack Daniel's may be a fine drink, but its parent company's stock performance has been a sour mash. JD maker Brown-Forman (BFB) has grown earnings 8% annually over the past 10 years--same as Anheuser-Busch--but its P/E is 17, compared with Anheuser-Busch's 23. At a recent $60, Brown-Forman is 13% off its 52-week high. This despite the best U.S. alcohol market in a decade and the fact that Jack Daniel's (which accounts for more than half the firm's profits) is the world's second-fastest-growing premium booze behind Absolut.

That has Lehman Bros. analyst John Wakely wondering if Brown-Forman is "too good to be public" and suggesting it should be taken private if investor interest doesn't pick up soon. David Winters, head of research at Mutual Series, which owns about 5% of Brown-Forman, notes that future earnings growth looks solid--at least 9% annually the next three years. And with Seagram selling off its spirits business, Brown-Forman could pick up another brand or two, which could drum up more interest. "It's an enormously powerful consumer-products company that's trading at a modest valuation, not only to other consumer-products companies but also to its intrinsic value and long-term prospects," says Winters. "The odds are overwhelmingly in our favor." --JEFF NASH