Long-term stockholders of AT&T (NYSE: T) often wonder why Wall Street refuses to laud their company despite Ma Bell's massive spending on hot technologies such as broadband cable and wireless.
If you spent $10,000 on AT&T shares one year ago and held onto them, you've lost almost $1,500 so far. In the two years and three months since C. Michael Armstrong took over the helm, AT&T has underperformed rivals Sprint (NYSE: FON) and MCI Worldcom (Nasdaq: WCOM), though those stocks have lately slumped. And T shares are down slightly today following the company's fourth quarter earnings report.
Unfortunately, the company has larger perception problems. It just doesn't carry the vibrant, roaring aura Wall Street prefers these days.
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This morning's conference call captured the situation well. Armstrong and his cohorts were justifiably happy about another solid quarter, but when pressed by analysts for new initiatives on cost-cutting or broadband or phone service, executives gave long-winded answers that boiled down to: "We're going to do what we said we'd do."
Problem is, it's difficult to be inspired by AT&T's plans. Yes, getting into broadband cable is a good thing. Yes, expanding wireless is laudable (not to mention necessary). Yes, cost-cutting is always welcome.
Yet barring high growth on the bottom line, Wall Steet will withhold its blessings. AT&T proponents will point out that profits don't seem to be a market concern for other, smaller technology and communications companies. They'll look at soaring valuations for an ISP like America Online (NYSE: AOL) or an IP telephony specialist like Net2Phone (Nasdaq: NTOP) and say, "We've got all that, and our businesses are far more solid. Why isn't our stock higher?"
But most of these hot stocks are relatively new operations, especially compared to Ma Bell. Their youth gives them more leeway.
The market, rightfully or not, is stricter with a mature company like AT&T. Blue chip investors certainly aren't encouraged when Armstrong tells them to expect 2000 earnings no more than $2.15 per share, or a nickel less than last year.
Today's call also highlighted AT&T's tendency to set realistic financial expectations, instead of lowballing them. That's laudable in theory, but the market prefers companies that blow out the numbers, which usually means managing analyst estimates. AT&T is content to meet its guidance rather than exceed it.
And financial performance aside, Wall Street still hasn't bought into Armstrong's strategy. Buying corporate slugs like TCI or MediaOne didn't excite the market then and doesn't excite it now. The fact that AT&T has to pump in additional billions just to make the system viable for modern use carries even less attraction for investors.
On the wireless side, everyone's looking to the tracking stock IPO currently slated for April. The move might be a way to grab the value of those assets, but now that everyone knows about the idea, they're waiting on the sidelines for it instead of buying AT&T stock. I suspect as the IPO gets closer, many individual investors will buy T as a proxy for the wireless shares.
(By the way, I hate the concept of tracking stocks even though my employer trades under one, for which I have stock options that I'm not about to give back -- idealism is one thing, practicality quite another. In any case, my preferences and the market's desires rarely coincide)
Armstrong touts his proposals for the future, but most of America hasn't seen results. Certain pieces are available to me as a AT&T cable subscriber here in San Francisco, but I want to know when Ma Bell is going to offer me the complete bundle of communications services supposedly coming through the lines.
Maybe the entire infrastructure hasn't been upgraded yet in the Bay Area. Maybe AT&T is still refining technologies such as IP telephony.
As a customer, I don't care what the reasons are. All I know is, AT&T's grand offerings have yet to materialize for me and most consumers. Until the sales pitches start appearing in our mailboxes and start supercharging AT&T's profits, Wall Street won't push AT&T to new heights.
People might frown on AT&T spending billions for cable, but MCI Worldcom shareholders don't mind seeing their stock diluted as long as Worldcom increases share in its current markets. That's the big difference between the two largest U.S. telecom companies: Ebbers isn't asking his shareholders to accept a new business model; but Armstrong wants AT&T's investors to embrace a different vision from the one they're used to.
Judging by their companies' differing stock trends over the last two years, Armstrong either has the tougher job or isn't as competent as Ebbers. I'd bet it's mostly the former.
Today's market hacked the legs from underneath Tellabs and sent the stock tumbling after the company told analysts to lower their first quarter estimates. But the reasons for the shortfall are either laudable or out of the company's control: a higher tax rate, field trial costs and higher research spending.
A bigger R&D budget helps in the long run, better to get your field trials right rather than put out buggy products, and taxes, well, they're inevitable. Tellabs remains comfortable with analysts' full-year estimates, so things can't be that bad. 22GO