Mea Culpa on AT&T, but the Upside Remains Real

In late August, I wrote a bullish piece on AT&T (T). Since then, the stock has fallen from $31.75, bottomed at $21.25 and clawed its way back to the $27-$28 range. There is no getting around the fact that if you had bought T back then, you would be sitting today with a 13% paper loss. Big help.

Telephone Tumbles It's been a rough year for AT&T and its shareholders

I could blame the decline on the general selloff in the stock market. I could attribute it to the even more severe decline in telecommunications shares caused by the increasing glut of telecom and broadband networks. Or I could blame T's slide on tax-loss selling by big fund complexes.

I owe you more than that. I owe you a follow-up, especially in light of the recent spate of reports confirming that AT&T CEO Mike Armstrong and the board of directors are planning to break up the company to help investors realize its intrinsic value. (My colleague Scott Moritz wrote presciently about this possibility earlier this month.)

Let's go over my sum-of-the-parts valuation again:

I wrote in August that the company's stake in AT&T Wireless (AWE) was worth about $13 share. Given that Wireless now trades in the market for less than it did in August, let's mark T's stake down to $10 a share. (I get to that estimate by valuing the wireless business at 16 times EBITDA , or earnings before interest, taxes, depreciation and amortization.)

The cable business was also worth $13 a share to me in August. (That calculation was based on a $3,000 per-subscriber assumption.) I'll stick with that.

Business services and long distance were, I said, worth another $22 a share. I got to that number by applying a conservative 8 times EBITDA multiple to the business. Perhaps the corporate telecom business will grow more slowly than I had expected? Let's be even more conservative and use a 7 multiple. That lowers the value of the business unit to $19 per share of AT&T.

And then there is the boring, old, liquidating consumer long-distance biz. In August, I estimated another $8 a share in value. That assumed the consumer business was worth 4 times its EBITDA. Let's be even more cautious and say it is worth only 2 times EBITDA. That gives us $4 a share.

Then let's take into account AT&T's "net debt" of about $3 a share. In my first analysis, I assumed that the company's debt was completely offset by AT&T's various investments in other publicly traded media and telecom companies. This time, let's assume it is not a complete wash.

My new, extra-conservative valuation generates a sum of the parts value for T of $43. That contrasts with "a value in the mid-50s" as of August.

Does $43 a share that make T a good investment value? I'd say yes. The stock trades in the $27-$28 range.

It's also important that the odds have increased that the board will soon make the strategic moves needed to realize that value, according to recent news reports. The sooner the directors act, the sooner the intrinsic value will be realized and the sooner you will get your profit.

So hang in there if you own the stock. It appears finally to have bottomed. Unlike Salomon Smith Barney analyst Jack Grubman, who liked T at $60 a share and then decided to hate the stock in the mid-20s, I liked it at $32 and like it even more at $27. Call me crazy.

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