AT&T: A Good Call
Traders and investors returned from the holiday to see Bank of America Securities upgrade ATT to buy from neutral. Bank of America says it has adopted a more favorable opinion of the ATT purchase of BellSouth, which is scheduled to close by the end of 2006.
You can be forgiven if you don't know what ATT does or owns anymore. After so many divestitures and acquisitions and name changes, it's amazing anyone knows. The stock's symbol is still T, same as it was when ATT was the old Ma Bell phone monopoly. It's also still a component of the Dow Jones industrial average. But the current ATT is best described as one of Ma's young 'uns grown up.
SBC Communications, previously Southwestern Bell and also owner of ex-baby bells Ameritech and Pacific Bell, bought the remnants of ATT in late 2005 and assumed the iconic name. Now you know. Anyway, the stock listed as T is at $28, $1 below its three-year high, and yields a spiffy 4.8%. So far this year, it has returned 17%.
ATT's next big thing is its announced plan to buy BellSouth by the end of this year. The combination, if approved by shareholders and government regulators, would result in a giant telecommunications enterprise that provides regular phone service in 22 states and owns Cingular Wireless, the nation's biggest cell phone system. Verizon and big cable companies such as Comcast still would be formidable competitors. But it would get harder for upstart providers of voice services over the Internet and other telecom small fry to mount a serious challenge.
Girth in stocks isn't everything -- just look at General Electric and Wal-Mart the past few years. But an enlarged ATT seems like a good investment. As ATT and BellSouth combine their wireless operations and ATT further consolidates phone, DSL and other services under its famous brand, the combined company can cut advertising and other marketing and management expenses. That should boost profits nicely.
With so few large telecom stocks left, it's of limited value to compare ATT's value measurements to those of its peers. At any rate, Wednesday's Bank of America report predicts that the combined ATT/BellSouth will be one of the cheapest blue-chip telecom stocks based on 2007 earnings expectations, which rest on analysts' assumptions about the merger savings. The analysts set a target price of $30, which hardly qualifies as a sis-boom-bah endorsement. But factor in that 4.8% yield and the relative tameness of the stock and ATT seems like a good choice for conservative, income-oriented investors.