Sunday, January 23, 2005

Some Fundamental Analysis...Finally

Enough is enough...let's face it; finding great value companies to buy right now is difficult. I was trying to give you timely buys, but this "value" drought could go on for quite a while. So, instead of waiting forever, let's take a look at one of the companies I was waiting for to get in a good position technically as well as financially.

The company is AT&T (NYSE: T). I have been watching this company ever since it got absolutely creamed in November 2002 and then again at the beginning of 2003. It has been trading in a range ever since.

With this post, I am not telling you to purchase T shares right now. I think AT&T will be a good buy soon, but not exactly today. I will explain this logic later in the post.

What this site aims to do is show the average investor how to invest for the long-term. I believe that most individual investors will be best served through a long-term "value" approach. That is what I am going to show on this site. I personally do a lot of different types of investing, but here I am strictly long-term value with a technical analysis twist.

In pursuit of the great "value" investment, fundamental analysts need to first take a look at the income statement. Then, peruse the balance sheet. Thirdly, FA's will gander at some cash flow statements. (I'm all out of synonyms for "look" now. Wait, there's probably a few more.) Lastly, I like to glance at the technical picture for areas of support to purchase long-term holdings.

The easy way to check on the fundamental picture is to mosey on over to, and take a look at what their guru analysis program says about AT&T. It seems they believe AT&T only passes 43% of their Benjamin Graham criteria. Here the lazier of investors would quit looking, but a further analysis might be necessary in this case.

The problem with programs such as the guru analysis is that they get their numbers straight from places like Yahoo Finance. This is usually fine to do, but in fundamental analysis sometimes you need to look at the seperate line items to get a better idea of the financial strength of a company. For example, the guru analysis doesn't know that AT&T had a rather large non-recurring item in the third quarter of 2004. These non-recurring items should not be taken into consideration when figuring a companies long-term earning power.

It seems to all of these programs, such as the guru anlysis page or even, that AT&T doesn't have any earnings for 2004 and therefore doesn't have a P/E. Many individual investors will pass on a stock without a P/E, especially value investors. A little detective work will give you a better understanding though.

With the large non-recurring charge AT&T has earnings per share for 2004 of -7.68. Now, let's take out that non-recurring charge of $12.5 billion to see what the long-term earnings power actually is. I have figured a per share earnings of $2.01 when taking into consideration the one-time charges, restructuring charges, stock option expenses, and pension adjustments. The new EPS would give AT&T a P/E of 9. This is a definite change in perception. All of a sudden AT&T is on the value investors radar screen.

Now let's see if AT&T passes the rest of Benjamin Graham's value criteria:

  • P/E 9 = Yes, the P/E should be below 20 according the BG criteria
  • Price/Book 2.24 = No, the Graham criteria requires a P/B below 1.5
  • Current Ratio 3.68 = Yes, BG criteria says the CR should be above 2
  • Revenue Growth -7.21% (10-Yr Avg.) = No, according to the Graham criteria RG should be greater than 15%
  • Intrinsic Value $17.20 (S&P Fair Value) = No, BG criteria looks for IV's that would allow for at least 15% growth
  • Dividend Yield 5.25% = Yes

AT&T passes 50% of our Benjamin Graham criteria. A strict value investor would move on and look for other values, but I believe AT&T deserves another look. That dividend alone is making my mouth water. There is even talk about them raising it.

AT&T is putting in a compelling bottom at a time of heavy negative sentiment (See here and here for examples). A lot of the time value investors and contrarians are looking for the same thing. This extreme negative outlook is overblown and the reasoning is short-term. AT&T is restructuring to fit what they believe is the future. They are not worrying as much about the present as the naysayers.

The large restructuring that occurred in the third quarter of 2004 was due to AT&T getting away from the consumer part of the business to focus more on its business customers. I believe this is a good idea because the consumer part of the communications business is moving to low or no cost. With the advent of VOIP, communicating anywhere in the world is free. How can you compete with that? If you can't beat them, join them. That's what good 'ol Ma Bell is doing, and that's why I'm not worried about these naysayers.

I believe AT&T is a compelling long-term purchase; so let's take a look at the technical picture to find points of support for purchase. As always we will be looking at the monthly chart first.

Click to Enlarge Posted by Hello

From the monthly chart, the biggest standout is the trading range that T has been in since around the end of 2003. The more risk adverse investor/trader should wait until T breaks out above that resistance line at $21.38. Those who are not so risk adverse could purchase closer to the support line at $12.08. I'm not so sure T will see those levels again, though. My clue to that is the break of the downtrend line that began at the beginning of 2001 and was just recently broken in December. We'll be able to tell more with the weekly and daily views.

Click to Enlarge Posted by Hello

There's not really anything new that we can see by looking at the weekly view. The only new piece of information we get is by looking at the Relative Strength Index (RSI) and Stochastics. Looking at these two technical indicators tells us that T is currently at overbought levels and should next come back down to oversold levels.

Click to Enlarge Posted by Hello

The RSI and Stochastics in the daily chart are showing more oversold levels. I always put more faith on the longer time span since I am a longer-term investor; so these daily technical indicators don't really tell me much. What does tell me something is the RSI uptrend that was broken on January 19th. This shows that T will head lower.

Looking at the daily price chart for AT&T can be confusing. There seems to be support, resistance, and trend lines going everywhere. This is where technical analysis can be seen as more of an art than science. When there are this many lines going every which way, I first look to see if any of the lines are converging towards the same spot. That can sometimes be a huge clue to the technical analyst for support and resistance levels.

The only converging lines I see are the trendline I colored purple and the 200-day moving average at around $16.15. This might be your set-up price where you would want to begin accumulating your positions. You will know more once T approaches that price. The point being that the time to accumulate is not today or probably not even next week. If the $16.15 level doesn't hold, then look towards $14 and then to $12. I don't think T will break $12; so if it hits those levels, I would load up (but in a safe and responsible way).

In summary, I believe the sentiment with regards to AT&T is overblown. I think T would be a good addition to a long-term portfolio, but at an "intelligent" price. I have shown above where I believe those "intelligent" price levels are at. As always, this report should only be a part of your analysis and not the only reason for your purchase of AT&T shares.

P.S. The other Investment Roundtable contributors have their AT&T analysis over at Sixthworld Management and Commentary. You should definitely check out what they have to say here.

Best Regards,

The Soothsayer of Omaha


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