AT&TInvestment Research Report

• Company Description

• Industry Analysis

• Competitive Analysis

• Risks and SWOT Analysis

• Valuation

Company Description

• A Fortune 500, American multinational telecommunications corporation, headquartered in Dallas, Texas

• Largest provider of fixed & mobile telephony in US

• Traces origin from Bell Telephone Company, which invented telephone

• In 1984, forced to divest into baby companies, which later on added competition for AT&T. Verizon being one of them

AT&T Operating Segments

O Wireless

Wireless voice and data communication services, local wireless communications and roaming services. Generated over 53% of company’s total revenues

O Wireline

Internet access and network integration, U-verse services, business voice applications over IP-based networks. Contributes to 28% of total revenues

O Other

AT&T’s international equity investments, a 47% equity interest in YP Holdings, and other corporate-driven activities and operations.

Other19%

Wireline28%

Wireless53%

AT&T Revenue Breakdown

Industry Analysis

O US wireless is a $200bn industry, with 300mn subscribers

O Saturation in voice call segment

O Data and Video new prime focus

O Estimates indicate data and video to account for 60% of network traffic by end of 2013

O Stable near term future based on steady economic recovery

The Road Ahead

O Severe spectrum shortages, forcing companies to expand existing portfolios

O Tighter FCC regulations would limit growth in domestic market

O AT&T actively looking for expansion in sub-developed European and Latin American markets, making use of reduced cost of borrowing

O AT&T has also signed a contract with FON to provide cheaper Wi-Fi access to its customers travelling abroad

Competition

O Technology

O Economy

O Comparable Alternatives

O Pricing

O Regulation

CompetitionDirect Competitor Comparison

T S PVT1 VZ Industry

Market Cap: 185.28B 27.77B N/A 143.66B 769.74M

Employees: 246,740 39,000 34,5181 178,300 1.63K

Qtrly Rev Growth

(yoy): 0.02 -0.01 N/A 0.04 0.03

Revenue (ttm): 128.17B 35.36B 19.16B1 119.53B 633.04M

Gross Margin

(ttm): 0.56 0.42 N/A 0.62 0.62

EBITDA (ttm): 28.44B 5.24B N/A 34.08B 251.58M

Operating Margin

(ttm): 0.10 0.02 N/A 0.15 0.18

Net Income (ttm): 7.48B -3.30B N/A 2.20B N/A

EPS (ttm): 1.37 -1.09 N/A 0.77 0.77

P/E (ttm): 25.75 N/A N/A 65.36 25.02

PEG (5 yr

expected): 2.19 N/A N/A 1.75 10.21

P/S (ttm): 1.44 0.78 N/A 1.20 1.22

S = Sprint Corporation

Pvt1 = T-Mobile USA, Inc. (privately held)

VZ = Verizon Communications Inc.

Industry = Telecom Services - Domestic

1 = As of 2011

Porter’s AnalysisO Rivalry

O Churn Rate

O Average Revenue Per User (ARPU)

O Lack of “Good” Spectrum

O Threat of SubstitutesO Cable TV and Satellite Providers

O The Internet

O Buyer PowerO Telephone and Data Services are a commodity

O Low Switching Costs

O Supplier PowerO Plenty Vendors

O Limited Pool of Talent

O Barriers to EntryO High Fixed Costs

O Federal Communications Commission (FCC)

O Lack of “Good” Spectrum

Risks

Business risks

Strategic risk

Operational risk

Compliance risk

Market risks

Interest rate risk

Foreign exchange rate risk

Interest rate risk

Financial instruments held

Manage interest expense

Hedge

Foreign exchange rate risk

Equity investments in foreign countries

Use of cross currency swaps to hedge.

Few risk factors

Worsening of US economy

Adverse changes in interest rates.

Adverse changes in global financial

markets.

SWOT Analysis

Strengths

a) Brand recognition

b) Experienced

management

c) Robust financials

Opportunities

a) New technology

b) Mobile apps

c) I-phone I-pad deals

Threats

a) Getting new spectrum

b) Competitors and

consolidation

c) Saturation and

slowdown

Weakness

a) Competitive segment

b) Union workers

c) Pension liability

Valuation

Dividend Discount Model

Free Cash Flow to Firm

Free Cash Flow to Equity

Dividend Discount Model

Used the following parameters:

Since AT&T is in the mature growth stage,

we calculated the required rate of return

using the implied growth rate, 2.26%

Assumed risk-free rate at 2.53%

Terminal value calculations based on

future values of dividends

Forecast: $34.47 - $36.86

FCFF and FCFE

Debt ratio: 43%

E(r) is 7.63%

WACC: 5.87%

Single stage model

FCFF value: $39.59

FCFE value: $34.75

Recommendation – Buy BuyBuy

With recent acquisitions in progress, AT&T

share price could exceed estimation

Continuously increasing dividends

Current Price: $35.72

Targeted range: $34.75 - $39.59