Here we are four years later and almost any Fool can present a reasonable bull argument for AT&T. What has changed since 1996? An easier question to answer would be "What hasn't changed?"
In 1997, C. Michael Armstrong became the first outsider to be hired as AT&T's chief executive officer (CEO). Since then, almost everything except the company's very name has changed -- and even the company's name has expanded into several more names, such as "AT&T Broadband & Internet Services." Mr. Armstrong arrived at AT&T with the vision that AT&T would become a one-stop telecom and, perhaps, media provider.
With that vision in mind, Armstrong began to turn the giant AT&T ship around, first by cutting thousands of jobs to lower costs, next by realigning employees in new divisions, and finally by acquiring companies to build a new strategy in a new world. The new strategy largely centers on two industries that promise to grow significantly over the next decade and longer: cable networks and wireless communications.
Asking the Right Questions
Much of successful Foolish investing is simply the result of asking the right questions -- questions that may appear deceptively simple, such as "How does this company make money?" And, "How can this company continue to make more money?"
Answering these questions completely can make you understand almost any business. For this positive argument about AT&T, we'll reduce our number of questions to only one broad, key query. The question is this: "In what industry does AT&T operate?"
The answer is "communications," an industry that has been pivotal for all of history. For human beings, communication began with cave drawings and facial expressions, moving to hand signals and pictograms, flourishing into elementary language, smoke signals, an alphabet, papyrus letters, foot messengers, telegrams, telephones, the Internet. Facilitating communication is an immense, vital business, and one that creates recurring revenue streams from the same customers. AT&T is the most widely held stock in the country partly because the importance of its industry has been obvious for the past century. What hurt AT&T in the 1990s was not its industry, but its execution. Now it is executing again.
Under Mr. Armstrong, AT&T moved faster than light in building a cable empire. After buying Tele-Communications, Inc. (TCI) and following the planned acquisition of MediaOne, AT&T will be the largest cable operator in the United States, towering over Time Warner <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TWX)") else Response.Write("(NYSE: TWX)") end if %>. Thanks in part to smart acquisitions, AT&T is also the country's mobile phone industry leader, growing its wireless subscribers 33.4% last year to 9.5 million. Most important is the fact that cable and wireless industries are only starting to bloom. The big payoff for leaders will be a long-term, recurring payoff.
AT&T's Broadband and Internet Services (ABIS) accounted for 9% of AT&T's total 1999 revenues. This division includes analog cable and high-speed cable Internet and broadband telephone services. This division's earnings before interest, taxes, depreciation, and amortization (EBITDA) recently declined due to higher expenses, but the division's new CEO, Dan Sommers, has pledged to reverse this trend. Digital cable -- the fastest-growing part of the ABIS division -- has 1.8 million subscribers, and should have 2.5 million to 3.0 million by the end of fiscal year 2000. AT&T also holds a 25% economic interest in cable Internet leader, Excite@Home <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ATHM)") else Response.Write("(Nasdaq: ATHM)") end if %>.
Wireless accounted for 12% of last year's revenue and in the latest quarter wireless revenue grew a giant 41.6%. In additional, average revenue per wireless subscriber grew 10.6% year-over-year, showing that customers are using the service more and paying more, while AT&T's Digital One Rate Plan has been a success. This year, the company expects to grow wireless subscribers over 20% (from 9.6 million) and revenue 25% to 30%. Of its wireless subscribers, nearly 80% use digital services, making AT&T a leader in the conversion of its customer base from analog cellular phones to digital. AT&T plans an IPO for its wireless division soon, and that could very likely unlock more shareholder value for AT&T shareholders.
Now, the "oldie but goodie." Being our nation's eldest and largest long distance phone company, AT&T has over 90 million customers, and long distance, local voice and data transmission, and related services account for nearly 40% of annual revenue. These businesses fall under AT&T's traditional Business Services and Consumer Services divisions. AT&T's leading ISP -- AT&T WorldNet, with nearly 2 million subscribers -- is also in this division. More importantly, perhaps, is that AT&T has been successful at protecting its long distance "cash cow" even while rolling out bold, new long distance plans like Digital One Rate.
Overall, AT&T is in the right business. Period. And it is beginning to execute again under recent CEO, Michael Armstrong. Sure, total sales grew only 6% last year, but it takes time to grow from a massive $64.1 billion in total sales. As the nation's largest cable provider and leading wireless giant, AT&T is positioned to grow these two key business divisions into much larger parts of its business. Meanwhile, the company has the benefit of enormous, steady cash flow from its long distance and local phone services. These services are growing much more slowly than something like wireless, of course, but when it comes to pure dollar creation, ya can't beat 'em.
The giant has stirred. Thanks to surprisingly quick action in acquiring cable companies and wireless leaders, this giant is now positioned to capitalize on strong growth in young, dynamic divisions over the next decade and longer. Plus, AT&T will converge its technologies to become a leading "all-in-one" communications provider. In a nutshell, AT&T is in the right place at the right time. That's the big picture. And that's the picture that matters to Foolish long-term investors.
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