AT&T Corporation (NYSE: T)
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AT&T Being Viewed As Internet-Technology Play, More Upside
AT&T Corporation (NYSE: T) has outgrown its reputation of being an interest-sensitive utility company. Despite the recent uptick in interest rates, the stock has climbed over 35% to $57 from a low of $42-43 in early October as fund managers have begun to build positions in the stock. AT&T is proving it is executing effectively in the integration of cable with its wired and wireless phones, as well as its long-distance operations. In addition, it is increasingly regarded as a technology-based company that is poised to exploit the growing Internet space. As more of the 'smart money' treats AT&T as a technology play, it will trade as a technology play. The party has just begun. If you were to map out recent developments within the last six months, it seems like more and more the largest telephone company in the US, AT&T Corporation (NYSE: T), is becoming more of a technology play rather than a straight utilities play.
The first thrust involves AT & T strategically positioning itself in the cable industry to take advantage of this exploding sector around the world.
The second major impetus is AT & T's creative inroads and aggressive penetration of the Internet in providing dial-up Internet access to its customers on a global basis. "the entry into cable will allow AT & T to raise rates, deny competitors access to its networks, and bundle services, all without the headaches of going to court"
Aggressive cable initiatives are expected to catapult company into leading US cable service provider.
The beauty of AT & Ts ambitious plans to penetrate the cable sector is in the favorable structure of the industry. In particular, the entry into cable will allow AT & T to raise rates, deny competitors access to its networks, and bundle services...
With Bill Gates of Microsoft paying $5B (representing a 3% equity stake in AT & T) to get in on the cable action with AT & T, you can bet that Gates conducted an extensive due diligence campaign before forking over the capital. Apart from the 11% position in Comcast Corp. (NASDAQ: CMCSA), this is one of a series of investments that Gates has made in order to capitalize on the riveting growth of the cable sector. AT & T's acquisition of Vanguard Cellular Systems and MediaOne Group [UMG], the third largest US cable company, is a strong indicator that broadband is the wave of the future. Broadband can carry more information than traditional phone lines to the extent that "in five or six years, cable could let you e-mail 600 times faster than you now can using a phone line", argues Michael Murphy, editor of well acclaimed The California Technology Stock Letter.
The beauty of AT & Ts ambitious plans to penetrate the cable sector is in the favorable structure of the industry. In particular, the entry into cable will allow AT & T to raise rates, deny competitors access to its networks, and bundle services, all without the headaches of going to court. It doesn't hurt either that the Federal Communications Commission (FCC) loosened the reins preventing a single cable operator from owning too much of cable households-the purchase of TCI and MediaOne will give AT&T access to nearly 60% of US households. In addition, FCC official William Kennard filed a legal brief in support of AT & T, arguing free market competition will create more diverse access to ISPs and urged to continue the development of high-speed Internet systems. As well, AT & T is in the process of using its reputable franchise to change its revenue base. Over the last two years, nearly 75% of the revenue base came from long-distance services; according to Anthony Ianthosca of Investor Relations at the company, cable will result in a substantial decrease in the concentration of long-distance sales.
How is their competition faring in this environment? If valuations are any indicator of expected future performance, MCI WorldCom (NASDAQ: WCOM) leads the pack. A cursory examination of the fundamentals of the two companies indicates there are valuation disparities in this hybrid Telecom/Internet sector to be exploited. For example, MCI is a much smaller company (in terms of asset base) with substantially fewer resources trading with a P/E of 48 times, and Price-to-Sales of 5.5 times. In comparison, AT & T is trading with a P/E of 24 times, and Price-to-Sales of 2.9 times. The two companies have similar market caps, yet AT & T is trading at a substantial discount (compared to MCI WorldCom) relative to its future growth prospects. The key difference is that MCI WorldCom (NASDAQ: WCOM) doesn't have cable, yet MCI is trying to turn into a world-class technology company. "If AT & T provides you with your phone service, your cellular service, your cable T.V. service, and throws in access to Internet - why pay AOL?"
With Internet traffic doubling every 100 days, AT & T's Internet dial-up model is likely to secure substantial market shares from its rivals.
"If AT & T provides you with your phone service, your cellular service, your cable T.V. service, and throws in access to Internet - why pay AOL?"
After extensive research, the Commerce Department has estimated that Internet traffic is doubling every 100 days. At this rate, simple geometric compounding indicates that this business segment will increase over 1,000 times. The importance of the internet was recently echoed by President Clinton: "We must connect all our citizens to the Internet, not just schools and libraries but in houses, small businesses, and community centers". With AT & T acquiring cable companies such as MediaOne and making significant investments in Internet firms such as @Home and Excite (NASDAQ: ATHM), the bundling of services is imminent. As Murphy points out, "If AT & T provides you with your phone service, your cellular service, your cable T.V. service, and throws in access to Internet - why pay AOL?". Presumably for content. However, the real question that lingers is whether portals make any sense in an environment where the bundling of competing services is handled by a single provider.
Is there any credence to the rumor of AT & T joining forces with AOL (NYSE: AOL)? Discussions with key company representatives indicate there is no credibility to the AOL/AT & T partnership. With AOL creating major obstacles recently for AT & T in creating a broad instant messaging system for its customers by shutting down Tribal Voice's access, AOL seems intent in sticking to their proprietary platform. However, it's just a question of time before AOL customers will demand unbridled access from their cable provider.
Cable, Internet, bundling of services, makes AT & T ripe as a leading technology company with limited downside.
Despite the pending outcome of the Portland court case resting on a judge's definition of what constitutes Internet cable connection in relation to its main rivals, AT & T is positioned to win the game in either scenario. Whether the future consists of connections that use wired or wireless phones, AT & T aims to have a vertically integrated strategy and a relentless focus on being the leader in local and long-distance wireless service, cable television, and providing Internet access worldwide. The key here is that given its highly stable cash flows, top-line growth, enormous size and economies of scale, the downside is limited. The worst that can happen is that AT & T maintains its cash flow position, remains a blue-chip telecom and cable operator with a loyal customer base, and a brand equity that is the darling of the industry. Not so bad considering where it's heading. |
