Has AT&T Become the Perfect Stock?
Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?
One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock, then decide if AT&T (NYS: T) fits the bill.
The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:
- Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
- Margins. Higher sales mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.
- Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
- Money-making opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
- Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
- Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.
With those factors in mind, let's take a closer look at AT&T.
What We Want to See
Pass or Fail?
5-Year Annual Revenue Growth > 15%
1-Year Revenue Growth > 12%
Gross Margin > 35%
Net Margin > 15%
Debt to Equity < 50%
Current Ratio > 1.3
Return on Equity > 15%
Normalized P/E < 20
Current Yield > 2%
5-Year Dividend Growth > 10%
4 out of 10
Source: S&P Capital IQ. Total score = number of passes.
When we looked at AT&T last year, it had a much better score of 6. Falling margins and weaker returns on equity are responsible for the point drops, and the telecom's minimal growth in the past year continues a disturbing trend.
AT&T has cast its lot with the high-growth mobile trend, largely ceding its legacy landline business to smaller competitors like CenturyLink (NYS: CTL) and Frontier Communications (NYS: FTR) . Its focus on building out its wireless network was instrumental in gaining first-mover status to carry Apple's (NAS: AAPL) iPhone exclusively, although the tech giant has since opened up the field to make its iPhone 4S available on Verizon (NYS: VZ) and Sprint Nextel's (NYS: S) networks as well.
Unfortunately, AT&T hasn't delivered the numbers that investors have hoped for. In its most recent earnings report, the company fell short on revenue and only matched earnings-per-share estimates. But with the late release of the iPhone 4S, everyone expects the fourth quarter to come in much stronger, with the potential for record-breaking sales. In addition, Android-phone sales accounted for about half of the company's total handsets sold.
Despite the ongoing controversy with its proposed takeover of T-Mobile, AT&T's future success lies with its broader strategy to bring bundles of services, including voice, video, and high-speed data not just to mobile devices but to households as well. If it can do so while overcoming a spotty reputation for service, AT&T could find itself closer to perfection in the years to come.
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate the best investments from the rest.
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At the time this article was published Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. The Motley Fool owns shares of Apple. Motley Fool newsletter services have recommended buying shares of AT&T and Apple, as well as creating a bull call spread position in Apple. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.