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7/3/2003
12:41 PM
William Schaff
William Schaff
Commentary
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Taking Stock: AT&T Struggles Through Tough Times

AT&T's stock has had a tumultuous year but has staged a rebound

We're halfway through the year and a number of tech stocks have done very well. But not all. Only a few stocks have posted a loss since the beginning of the year, and AT&T led the decliners in the InformationWeek 100 with a loss of 26%.

This follows the year in which Michael Armstrong's vision of AT&T as a broadband powerhouse was finally relegated to the dustbin. The corporate changes in the last two years have been relentless and massive. The most public changes were the spin-off of AT&T Wireless and Comcast's acquisition of AT&T's cable properties, but let's look at what's left and whether it might be a bargain in the wasteland of telecom companies.

Once it was clear that Armstrong's empire-building efforts had ended, he rode into the sunset as a Comcast director. In late 2002, David Dorman took over the helm at AT&T. Dorman was the CEO of Pacific Bell before its acquisition by SBC Communications and joined AT&T in December 2000. AT&T also found a new CFO, Thomas Horton, former CFO of AMR, American Airlines' parent company.

Today's AT&T has been trimmed to two divisions: AT&T Consumer Services (traditional long distance), accounting for $11.5 billion, or 30.3% of 2002 revenue; and AT&T Business Services, which had sales of $26.6 billion, or 69.7% of 2002 revenue. The most pertinent issue facing both divisions is revenue growth. Competition in the telecom industry continues unabated with significant downward pressure on prices. This is likely to continue as companies such as MCI emerge from bankruptcy with a lower cost structure from debt restructuring. Also, an increasing number of cell-phone plans have a flat fee that includes long-distance service. All this adds up to a harsh competitive environment. Consumer Services' revenue slid 17.8% during the first quarter compared with the year-ago quarter. The division is profitable, but operating profit declined 23% from last year, despite cost cutting.

The circumstances aren't as bleak for the Business Services division. Revenue declined 1.4% from the same quarter a year ago. While the long-distance portion declined 2.9%, local voice revenue grew 25%, though this accounted for only 5.2% of the division's first-quarter revenue. Data services managed to stay flat year over year at $2.0 billion in revenue for the quarter. A rebound in this division hinges primarily on businesses starting to increase their spending on telecom services, which should occur once the economy resumes growth.

AT&T stock has had a tumultuous year, with a steep decline in January following worse-than-expected results. The stock continued to slide to less than $14 a share but has since rebounded, in part because of AT&T's announcement that this year's revenue decline won't be as severe as last year's 10.4% and better-than-expected profitability in the first quarter. Taking the pricing pressures into account, I believe the stock may be undervalued as long as revenue doesn't decline faster than expected.

William Schaff is chief investment officer at Bay Isle Financial LLC, which manages the InformationWeek 100 Stock Index. Reach him at bschaff@bayisle.com. This article is provided for information purposes only and should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any security. Bay Isle has no affiliation with nor does it receive compensation from any of the companies mentioned above. Bay Isle's current client portfolios may own publicly traded securities in one or more of these companies at any given time.

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