AT&T (NYSE:T) released its first-quarter earnings numbers on Tuesday. Despite the fact that the company beat earnings per share by a penny, the stock sold off more than 3 percent on Wednesday. Does this mean that there’s a buying opportunity, or is this a warning that investors should get out after a nice run-up from $32/share in early February to $35/share today?
The primary reason for the selloff was that investors are concerned that while revenue is rising, revenue per user is declining. As a result, I don’t think that investors should be concerned. Recall that recently investors were concerned about Facebook (NASDAQ:FB) and Google (NASDAQ:GOOG) because the amount of money it was receiving for advertising clicks had been falling due to the fact that a greater percentage of clicks were coming from mobile devices. Had you bought these stocks when other investors were selling on this concern, you would have performed very well. I think the same holds true for AT&T.
AT&T is seeing a boom in its Mobile Share program. This is a family program where several people use the same plan and receive a discount for doing so. This has been great for the company’s revenues, as revenues were up 3 percent in the first-quarter from the same quarter a year ago. However, because this is less expensive program, the amount of revenue that AT&T is generating per user is declining.
While investors are concerned it seems to me that this is a high quality problem to have — the company is generating more revenue, and it is building its subscriber base. These seem like reasons to be bullish.
There are other reasons to be bullish as well. For instance, a lot of customers have complained about AT&T’s service. The company is responding by shifting its legacy service network to an all IP platform. This costs billions of dollars, but the company can afford to make the upgrade. Furthermore, it may be sufficient enough to bring back dissatisfied customers who might have switched to one of AT&T’s competitors.
Ultimately, this was a solid earnings report, and I think that the sell-off on Wednesday was more a response to the stock’s recent run-up than one driven by genuine bearishness. After all, the shares had run from $32 to $36 in just a couple of months, and for a company such as AT&T — a large, defensive name — this is too far too fast.
Looking at the company from a value perspective, there is a lot to like. The shares trade at just 10 times earnings, making it one of the cheapest stocks in the S&P 500. It also pays more than a 5 percent dividend yield, which is extremely high considering that bond and stock yields are at historic lows. The company also has a stock repurchase plan in place, and over the past couple of years, it has been reducing the number of shares outstanding.
Ultimately, it is rare to see a large, high quality company such as AT&T sell off more than 3 percent in a day. While the sell-off may not be over — as it may spook some shorter term traders and investors — it seems that a longer term opportunity is brewing in one of the world’s largest telecommunications companies. The stock is cheap, management is shareholder friendly, and the company is revitalizing its damaged reputation. Given these points, I think AT&T is a “buy” after earnings.
Disclosure: Ben Kramer-Miller has no position in AT&T or in any of the stocks mentioned in this article.