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Leigh Baldwin & Co.

112 Albany Street, Cazenovia, NY 13035 | Phone: (315) 655-2964 Toll Free: 1-800-659-8044

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Stock of the Week


April 3rd 2015

NYSE Symbol: T
Industry: Telecommunications
Price as of 4/2: $33.13


The first quarter is over and all I can say is, it was a struggle. The stock market extended its March decline on Tuesday, but was able to end the first quarter in the green. The S&P 500 lost 1.7% for the month, but added 0.4% during the first quarter. The tech-heavy Nasdaq led by Apple outperformed for most of the quarter, losing 1.3% in March to narrow its first quarter gain to 3.5%. The Dow Jones Industrial Average has taken the brunt of the selling losing 2.0% in March and shed 0.3% for the quarter.  A couple things are working against the Dow. First the energy sector is struggling due to weak commodity prices particularly oil. Earnings estimates for a number of oil companies have been slashed in half, yet the stocks may have more downside if the decline in oil persists for another six months or longer. In the meantime we'll see more oil production cuts, dividends cuts, and consolidation as the strong buy out the weak. Second problem with the Dow Jones is the strong dollar hurting multinational sales. As first quarter earnings start to roll in, plenty of multinational companies will blame the strong dollar on disappointing earnings. The strong dollar is however benefitting many foreign countries and regions including Europe. Europe is also benefitting from being a consumer of oil and not a producer. Throw in some quantitative easing and you can see why Europe and other regions of the world are outperforming the US. Back here however with earnings season about to start, being cautious seems to be the wise move. That's why this week, we're going defensive. The featured stock of the week is the second largest US wireless carrier, AT&T. The last two years have not been kind to AT&T. Since hitting $39 a share in 2013, the stock has fallen 15% not including dividends. Add insult to injury, AT&T was kicked out the Dow last month, replaced with Apple. But this may signal a bottom for AT&T. A couple of mega-mergers with Direct TV and Mexico wireless properties, plus a dividend yield of 5.7% looks very enticing as the broader market appears to be entering a correction phase.

As mentioned AT&T will go ex-dividend next week on April 8th for their quarterly 47 cents a share. They will follow that with their earnings report on April 22nd. Last quarter, AT&T reported inline earnings of 55 cents a share as sales rose a modest 3.8% to $34.44 billion. Wireless revenues rose 7.7% while wireless data billings grew 18% year over year. The company added 1.9 million total net adds with 5.6 million total net adds in 2014.  As the U.S. wireless market reaches saturation, the company has been expanding its footprint in Mexico to grow its business acquiring bankrupt NII Holdings, a Mexican wireless business for $1.875 billion. In the second quarter AT&T will look to complete its acquisition of Direct TV. In the short term, these deals won't add much, but longer term, they provide growth opportunities for AT&T to expand via satellite and Internationally.

Currently AT&T is not far from its two year low of $32 a share. The $32 range has provided good support for the stock signaling hopefully limited downside. The valuation for AT&T looks compelling trading for 1.7 times sales, 13 times earnings, 12 times next year's earnings with a juicy yield of 5.7%.  Compared to the worst performing sector this year, the utilities, AT&T looks down right cheap. Many of the utilities trade for 15 to 18 times earnings with yields significantly less than AT&T. If the broader market continues to pull back, defensive stocks like AT&T will become very popular once again.