Is it `Buy AT&T!' or `Hold the phone'?

Cliff Robertson may convince you American Telephone & Telegraph Company is ``The Right Choice'' for long-distance calls. But brokers have found the post-divestiture Ma Bell a tougher sell. That is, until lately. After trailing far behind the stampeding bull market for 3 years, ``Telephone'' has suddenly raced to within an optical fiber of its all-time high. The stock closed at $29.125 last week, up 16 percent in the past month. Some money managers, such as J.David Mills of the Boston Company mutual fund group, now see AT&T as a $50 stock in two years.

What's sparking the optimism?

In mid-June, the company reported April long-distance profits were up 69 percent over April 1986 earnings. That surprised a few Wall Street analysts and prompted a round of higher earnings estimates for the year.

In Philadelphia last week, AT&T's chief financial officer, Robert M. Kavner, told analysts that second-quarter earnings would be strong.

Hearings before Judge Harold Greene, the architect and overseer of the divestiture process, generated some positive (or at least no negative) news last week for the telephone company. The seven ``Baby Bells'' are seeking to compete against AT&T in long distance, manufacturing, and information services. But based on Judge Greene's comments, the regional phone companies may only get a toe in the door of information services - such as phone-linked burglary systems, dial-a-stock market quotes, and home banking.

``It doesn't hurt AT&T for them to get into this; it's primarily a local business,'' says Richard Toole, a Merrill Lynch & Co. analyst. ``In fact, AT&T could benefit. It sells equipment to the regionals that helps them provide those services.''

A decision from the judge is expected by September or October. A green light for the Baby Bells in manufacturing or long distance is a long shot, but it could happen.

``Judge Greene is a very unpredictable chap,'' Mr. Toole warns. ``You can't draw absolute conclusions from what he says in the hearings.''

Longer term, analysts cheer the prospects of easier federal regulation. Dennis R. Patrick, chairman of the Federal Communications Commission, wants to abolish the fixed rate of return. At present, AT&T is limited to a 12.25 percent rate of return. ``That cut their profits this year,'' notes Argus Research analyst Geoffrey Johnson. ``Through cost-cutting, layoffs, and factory downsizing, they generated $1 billion in savings. But the rate-of-return limit forced them to give up $1.5 billion.''

The FCC advocates protecting consumers by capping long-distance prices rather than limiting profits. The agency is expected to submit a plan by this fall. A change would ``be very significant,'' Mr. Johnson says. ``AT&T would then have the ability to increase profits'' - something Wall Street likes.

Against that buoyant backdrop, some, such as Toole at Merrill Lynch, consider AT&T a buy for investors with a horizon of one year or longer. But near term, Toole sides with the consensus view: Hold or sell.

``The market's become too optimistic here. I don't see much growth in earnings for the next 18 months,'' says Joseph Muldoon, telecommunications analyst at Janney Montgomery Scott. ``You won't see dividend growth for several years. Should you be paying 17 times earnings for this kind of stock?'' he asks.

``When we net out all the fundamentals, we conclude AT&T should trade, at most, 10 percent higher over the next 12 months,'' says Eileen Polsky of Drexel Burnham Lambert in a recent report.

Overall, Johnson doesn't expect the phone company to earn more than $1.40 a share this year. That's on the low side of the mean estimate of $1.53 among analysts tracked by Institutional Brokers Estimate System, a service of Lynch, Jones & Ryan, though the estimate is rising.

Johnson cautions against getting caught up in this spate of enthusiasm for the stock. ``After the breakup in 1984, AT&T said they would earn $2 per share in 1985. They haven't yet achieved that. And I don't think they'll earn $2 in 1988. I think US Sprint [jointly owned by GTE Corporation and United Telecommunications] is a more interesting investment.''

The stock markets were closed Friday. The Dow Jones industrial average slipped 0.16 points last week, settling at 2,436.70.

About these ads
Sponsored Content by LockerDome

We want to hear, did we miss an angle we should have covered? Should we come back to this topic? Or just give us a rating for this story. We want to hear from you.

Loading...

Loading...

Loading...

Save for later

Save
Cancel

Saved ( of items)

This item has been saved to read later from any device.
Access saved items through your user name at the top of the page.

View Saved Items

OK

Failed to save

You reached the limit of 20 saved items.
Please visit following link to manage you saved items.

View Saved Items

OK

Failed to save

You have already saved this item.

View Saved Items

OK