The Stockles Risk Rating is created with the purpose of getting to know the business. I believe the best way to stay rational and calm in a stressful market is to know what you own and know what it’s good for. This Risk Rating is not absolute and a company can fit my portfolio even if a few questions are negative. I do a Risk Rating every time I buy a new company to make sure I know what this partnership truly means.
About the Company
1. Geopolitical Risk: Is this company free of meaningful geopolitical risk?
Answer: Generally, no. There is some geopolitical risk in Latin America, in particular.
2. Market Cap: Is the market cap greater than $1 billion?
3.Repeat Business: Does the business have high repeat customer usage?
Answer: Yes. AT&T operates within 4 segments: Business Solutions (40% – Wireless, Legacy Voice, and Data governmental with around 3 million businesses).
Entertainment (30% – Video and audio channels to 25 million subscribers, broadband and internet to 13 million connections in 60 countries).
Consumer mobility (20% – wireless, roaming, devices).
International (4% DirectTV and Sky in Latin America. Also, wireless subscribers).
In total AT&T has around 80 million postpaid customers, and 14 million pre-paid. AT&T monthly churn rate is the lowest in the industry. Together with Verizon, AT&T leads the wireless market. It’s also the leader in Pay-TV, with DirecTV beating Comcast, Verizon, and Dish.
4. Brand 1: Does the company have brand strength with passionate advocates?
Answer: Yes. One of the major four: AT&T, Verizon, T- Mobile and Sprint.
5. Brand 2: Does the company’s business rely on recognizable branding truly valued by its buyer base?
Answer: Yes. Since customers will want the best wireless… they will focus on getting the maximum out of their purchase. Unlimited data-plans are sexy, and AT&T offers a $90 unlimited plan that continues to gain subscribers thanks to the company bundling a $25 Pay-TV discount, as well as offering free HBO (a Time Warner company). AT&T gets top ranks in customer service.
6. Safety: Is the Safety Score from SSD more than 75?
7. Growth: Is the Growth Score from SSD more than 75?
8.Yield: Is the Yield Score from SSD more than 75?
9. Is the company recession-proof?
Answer: Yes. AT&T dropped 45% during the financial crisis, but sales only decreased -0.9%
10. Does the company have a recent record of revenue growth (Revenue CAGR) that’s any good?
Answer: It’s lagging the market by 2-5% during the last 5 years.
11. Growth: Did the company increase its sales by 10% to 40% annually in the previous three years?
Answer: No. Sales growth is normally around 1-3 %
12. Profitability: Was the company profitable during the past year?
13. Consistency: Has this company shown consistent profits in each of the last five years?
Answer: No. Profit ranges from 4% to 12% in the last 5 years
14. Cash Flow: Was the company cash-flow positive for the previous quarter? The last 12 months? Two of the last three years?
15. Diversification: Is the company free of any customer or supplier that accounts for more than 10% of sales?
16. Independence: Can the company execute its business plan without relying on external funding?
Answer: Unsure. In this capital-intensive industry, it’s important to always make purchases. With the Time Warner Deal, AT&T needs to collect a lot of debt. Time Warner will probably add a lot of value to the pipeline (in the long-term), but in the short term, unsure.
17. Leverage: Is the company’s debt-to-equity ratio of less than 1.0?
Answer: No. It’s 1.16
19. Current Ratio: Is the current ratio more than 1.0?
Answer: No. 0.90. Might need to raise cash to meet short term obligations
20. Net Debt / EBIT: Is the Net Debt / EBIT lower than 2.0?
Answer: No. Very high at 5.5
21. Financial Transparency: Are the financials easy to understand?
22. Return on Equity: Is the ROE/ROIC greater than 12% each year for the past five years?
23. Yield: Does the company yield more than inflation?
23. Dividend CAGR: Is the CAGR more than 5%?
Answer: No. 1 year is 2%. 3 years is 2%. 5 years is 2% and 10 years it’s 3%
24. Payout Ratio: Is the payout ratio less than 70%?
Answer: No. It’s normally around 50% to 70%, but now 91%
25. Dividend status: Is the company a king, aristocrat, contender…?
Answer: Dividend Aristocrat
26. Underdog: Is it free from stronger competitors?
Answer: Unsure. The only major competitor is Verizon and T-Mobile. The market is very capital intensive and it’s hard to operate on the national level. Also, the market is very mature. Hard to grow.
27. Goliath: Is it free from disruptive upstarts?
Answer: Unsure. In TV, companies such as Netflix cause competition, but not on the wireless part, only on content.
28. Moat: Are there signs of strong competitive advantage?
Answer: Yes. Switching costs are very high. Mature market. Extremely capital intensive
29. Is the company likely to avoid disruption and see most of its key markets continue?
Answer: Yes. But the potential merger between T-mobile and Sprint is dangerous,
30. Is the company Amazon-Proof?
31. Market Cap: Does the stock have a market cap of more than $750 million?
32. Beta: Is this stock’s beta less than 1.3 for the past 12 months?
33. P/E ratio: Does the stock have a positive price-to-earnings multiple that is less than 30?
34. Forward P/E ratio: Does the stock have a positive price-to-earnings multiple that is less than 30?
35. P/B ratio (financials): Does the stock have a price-to-book multiple around 1?
36. Forward P/B ratio: Does the stock have a price-to-book multiple around 1?
37. P/S ratio (growth): Does the stock have a price-to-sales multiple around 1 – 2 or less than 1?
38. Forward P/S ratio (growth): Does the stock have a price-to-sales multiple around 1 – 2 or less than 1?
39.Insider Stake: Do founders and top executives have at least a 5% stake in the company?
40. Management: Is management trustworthy? (Do they do as they say, ROE, ROIC, Capital Structure, Long-term Stock Price growth, and Risk Control)
Answer: Yes. Management has shown that they care about shareholder return while being risk-averse. The ROIC is positive and the Time Warner should benefit the pipeline.
- AT&T should be seen as a bond-substitute. One should expect around 5% dividend return and 2 % earnings growth. AT&T is quite special since it operates in a very matured market and there is very little growth potential. Few investments were the dividend return is the main driver, should be considered for a future-oriented investor.
- There are two main issues with AT&T: The potential risk of increased potential from Verizon and a merger between Spring and T-Mobile. This will cause even lower earnings growth, and therefore put the fair price for AT&T lower. The main issue is the deal with Time Warner. Here, we just have to trust the experienced management and that the debt is controllable. This deal can go many ways, and if there will be no deal, I’m sure the market will react negatively.
- My cost basis for AT&T is $34. I think it’s very important not to overpay for this company. We saw that AT&T dropped as much as 45% during the financial crisis and even though it recovered, the paper loss was significant. On a historical basis, fair value is probably around $40-45, but keep in mind that a margin of safety is needed because the limited growth is dangerous, and the deal with Time Warner can go many ways. Rising interest rates put pressure on AT&T as well.
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