Reaper, do you have an opinion on T?
From some couple week old Barrons:
Q: Mike, what do you like?
Cahill: AT&T. As an AT&T shareholder, you will get two pieces of paper at the end of the year: AT&T long-distance and AT&T Comcast, which will become Comcast. The stub, or long-distance piece, is currently trading at around $2.70 a share, adjusted for the split-off. That's three times Ebitda. The stub generates a tremendous amount of free cash flow, around $3 billion this year. The company is totally out of favor. AT&T is at an 11-to-12-year low, yet it's got the third-best balance sheet in the industry behind BellSouth and SBC, measured in terms of debt to cash flow. Their competition is struggling with excessive debt, SEC investigations and massive potential shareholder lawsuits. Over the next year, AT&T will begin to take share from the weaker, highly leveraged players. They're the dominant provider of high-end business telephony solutions. The industry's recent [downward] pricing trends have been moderating, and in certain cases going up, primarily because the competition is suffering.
Q: What about management?
Cahill: Dave Dorman, the president of AT&T and the likely CEO of the stub, has done a great job. He was at PacBell and then SBC after it bought PacBell. He's been in the telecom industry for about 20 years. He's recruiting a topnotch team and he's able to do that because there aren't that many places to work right now in the industry.
Q: What obstacles do they face?
Cahill: The RBOCs entry into long distance is negative for the consumer long-distance business of all players. AT&T typically loses lower-end customers to the RBOCs. The consumer business has been difficult for AT&T, but that will stabilize in the next couple of years. Most of the financial models for AT&T have its Ebitda declining into perpetuity, but even if you factor that in you still get a doubling of the stock price of the stub because of the free cash flow they generate. There is also the potential for AT&T to be bought once they complete the Comcast deal because it is a dominant provider of business telephony solutions. Also, it would be immediately accretive to all the RBOCs because it has a great balance sheet and a low valuation.
Q: So the babies will eat their mother! How do you value the stub?
Cahill: I think it can get to $6 conservatively, based on four times cash flow and a multiple of 10 times earnings. It's one of the cheapest things out there. There's one negative. AT&T has nearly a $3.5 billion obligation to acquire the equity of AT&T Canada, and they are going to do a secondary offering this week to do that. My recommendation for investors is to buy AT&T in that deal because it should represent the low-water mark for the stock and both the stub and the Comcast piece should significantly appreciate afterwards.
Q: You also like the Comcast piece.
Cahill: The shares that will become Comcast are very attractive, too. That deal should be completed by the end of the year. Comcast's management team is one of the industry's best. They have created tremendous value over the past 30 years. Without any real economic recovery at all, if they successfully bring the low margins at AT&T Broadband from 21% up to their projected 35% to 36% by 2005, the combined Comcast should grow cash flow by 20% in 2003, '04 and '05. Comcast by itself will generate $750 million to $1 billion in free cash flow in 2002. Doing the acquisition takes them off that free-cash-flow path for a while, but they should be free-cash-flow positive, possibly by the fourth quarter of 2003 and absolutely by 2004.
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