|
AT&T: Value lover's delight
|
 |
December 21, 2001: 12:16 p.m. ET
It ain't sexy. But the new AT&T -- less broadband -- might just be a good value.
By Pablo Galarza
|
NEW YORK (CNN/Money) - Wall Street's abuzz with AT&T's sale of its broadband cable business to Comcast. But the remaining portion of AT&T is being ignored and that could make this a great time to buy the stock.
Sure, cable is the future. It's the basis for high-speed Internet access and the dream of a fully connected digital world. That was the whole point of AT&T's gamble in 1999, when it plunked down more than $100 billion to become the nation's largest provider of cable service. AT&T couldn't do anything with those assets, however, and now they'll be splintered off to create AT&T Comcast.
But I think the real value play here is in the assets that will remain under the AT&T moniker. The way I figure it, if you back out Comcast's $13 a share offer for AT&T's broadband business, the rest of AT&T is valued for a mere pittance -- $5 a share or $17.5 billion in market value.
What does that $5 buy you? Two operating units -- one focused on global corporate customers, the other on the consumer market. Admittedly, both are going through rough patches.
Once a great cash cow, AT&T's residential long distance is drying up as competitors like Qwest and the Baby Bells jump into the already crowded game. That's why the profitability of this division is on a collision course with zero. Analyst Tim Horan of CIBC Oppenheimer estimates sales could plummet to $12.6 billion by the end of 2002, a 40 percent decline from 2000. More worrisome is the dramatic drop in EBITDA (earnings before interest, taxes, depreciation and amortization) -- forecasted to be a 60 percent decline from 2000.
The business-services side doesn't look much better right now, with little or no growth in revenue and profits. But it remains a powerhouse in its $100 billion market, duking it out with arch-rival WorldCom to sell large corporations telephone, data and network services. And business should rebound once the economy picks back up. "The sales force, the customer relationships with Fortune 1000 companies, the brand name and expertise in building networks are very valuable assets," says Kurt Funderburg, an analyst with Oakmark -- the Oakmark Select fund has more than 4 percent of its assets in AT&T.
Together, these two divisions will be a formidable player in the telephone business with $38 billion in revenues and $9.8 billion in cash flow. Salomon Smith Barney's Jack Grubman figures that, excluding the cable business, the new AT&T is being valued at three times cash flow and a P/E of six based on his 2002 earnings estimate of 85 cents.
Even better, the Comcast deal relieves AT&T of much of its heavy debt load, so interest coverage will skyrocket to nine times versus four prior to the deal. And as debt drops the equity portion of AT&T should increase in value. "This deal leaves the telephone business very well positioned," says Funderburg.
So whether these business go it alone, or are bought by another company, the remaining bit of AT&T is worth far more than the market is recognizing. "There is a lot more value left in AT&T than is being implied in the share price," says Funderburg, who figures that those remaining units should be worth at least $10 a share.
What should investors do? This deal isn't expected to close until mid-2002. In other words an eternity. Until that time, keep an eye on the share prices of AT&T and Comcast. Assuming Comcast's stock stays in the mid-$30s, its offer for AT&T Broadband is worth about $13 a share. So anything above that is the market's valuation of AT&T's telephone business. If AT&T's shares stay below $20, I'd say it would be a marvelous buying opportunity for a blue chip company that will remain a force in the telephone business. 
|
|
|
|
|
|
|
