AT&T (T), known for its consistent dividend and reliable business model has found itself on the undervalued list during recent analysis using our calculator.
Before we break down the results, a quick background of DCF Tool can be found here.
While our default analysis predicts a 15% growth rate, when you consider AT&T as a whole, I don't think using historical performance is useful. The telecommunications industry isn’t one that I would expect huge growth, especially not at a 15% rate. Looking at the most recent 3 years, AT&T hasn’t seen much of any growth- thus using 15% doesn’t make much sense.
As AT&T is a fully developed company in an industry with seasoned competitors, a more conservative growth rate should be used. Reviewing estimates from multiple sources, I believe using a 4-6% growth rate is a more conservative and realistic rate, which is what will be used for this analysis. We will also look at one significant competitor and how it compares later on, for further justification of this undervalued alert.
As of this article, the WACC (discount rate) is calculated to be 4.7%. This is somewhat on the low side if you consider the typical discount rate to be somewhere around 8-11%. I will therefore edit this to a more modest 9% (remember, a higher discount rate results in a more conservative analysis).
For this model I have adjusted the Terminal Rate to 0%, as using the default 2% is substantially close to the normal growth rate and therefore significant to the assumptions of the model.
For an added margin of safety, I have fixed the first future year flow from the 4-6% of the previous years’ to a fixed $35 billion. 2 out of the last 3 years have seen $35 billion in free cash flows, thus using this as our starting point gives even more safety into our modeling.
Based on these inputs, AT&T is undervalued by 53-56% from its current stock price of approximately $27.5. For a fully developed company with consistent financials, this is unique and indicates the market may not be properly pricing the company.
As a gut check with DCF Tool, I have removed the growth rate entirely to 0% and kept the 0% terminal rate. This helps to protect if any of your assumptions, in this case the growth rate, are significantly off. Using these safety checks, AT&T still provides an astounding 47% undervalue proposition.
Simply put, even if AT&T never grew by another penny, it is still trading at 47% below its current intrinsic value.
As a final gut check, we can use AT&T’s largest competitor to see how they compare. Do they outperform, or is the industry as a whole giving undervalued signals? Verizon (VZ) stands out as the main competitor to compare. Using the default values in DCF Tool (which provide an optimistic outlook for Verizon, the results show VZ is currently trading at exactly what it is worth.
This result is incredibly insightful, as it gives us the knowledge that the industry is not necessarily all discounted- AT&T may be uniquely situated based on its current market price.
Considering this comparison, along with the listed safety checks, AT&T presents a strong case for it being an undervalued opportunity to consider.
Disclosure: DCF Tool (I/we) have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from advertising/affiliate links). DCF Tool has no business relationship with any company whose stock is mentioned in this article.