For AT&T; Shareholders in an Uncertain Era, It’s Their Call
The company, the American institution really, that more than any other has been at the heart of economic and technological change is undergoing yet another profound transformation.
AT&T; last week spun off Lucent Technologies, its equipment manufacturing operation with $21 billion annual sales, to shareholders. The remaining AT&T;, with $51 billion in yearly sales of telecommunications services, is already plunging into expensive battles for local telephone customers and users of sophisticated wireless communications, the latest revolution.
For AT&T; to thrive, it must conquer new fields and may need innovative new leadership. Experts are divided about its prospects, so AT&T;’s 3.3 million shareholders--the highest number of any company in the world--must try to judge for themselves.
And that’s not an easy call, because AT&T;’s sheer size no longer assures success. Size was a strength for the company’s first 100 years, when it had a legal monopoly to help it build the nationwide telephone system.
Now it faces competition. It has impressive resources--roughly $10 billion a year in cash flow, from income and depreciation, and an unparalleled base of customers to whom it can offer new services. But its costs are higher than those of some of its new competitors.
The shareholders must think about industry trends and whether company management has the vision and ability to serve those customers efficiently.
In that respect, AT&T; holders are models for all investors. Change and a bull market have made them richer--in telephones, the stocks of AT&T; and all the regional Bell companies rose roughly 16% a year from the 1984 breakup through last year.
But competition and change threaten to shrink profit margins in companies large and small. It no longer makes sense to buy blue chips and put them away.
AT&T; stock took a tumble recently when management warned Wall Street that earnings would be lower than expected.
Yet analyst Stephanie Comfort of Morgan Stanley sees great promise. Earnings growth is slowing because AT&T; is investing heavily in the future, she says. Freed to do so by the new telecommunications law, the company is pushing into local telephone service, a $90-billion U.S. market. At the same time, it is combating new competition in long-distance, which is a $70-billion market.
As a result, Comfort sees the company earning a respectable $3.50 a share this year, making the current stock price of about $39 a relative bargain.
But Thom Brown, a managing director of Rutherford, Brown & Catherwood, a Philadelphia investment firm, sees AT&T;’s short-term future as one of terrible price battles with competitors jumping into long-distance.
Ultimately, Brown, a veteran AT&T; observer, sees AT&T; prevailing, although he worries because “I haven’t been impressed with AT&T; management the last 10 to 15 years.”
It has been a tough time. We should understand that overcapacity, of transmission lines and of switching equipment, is a defining word for the U.S. telephone system. No fewer than 1,200 resellers of long-distance service now buy telephone time wholesale and resell it at a profit under AT&T;’s price umbrella.
Therefore, mergers and consolidation are the rule even as telecommunications undergoes a technological revolution, with hand-held computer-communications devices and Internet phones ready to transform the business.
But technology can make your head spin. Investors should look at more human factors: namely, how well a company carries out its mission of reaching and serving customers.
AT&T; is the company built by Theodore Vail, who took the reins in 1878. Vail understood that AT&T; needed to stress reliable service if the telephone was to spread. He and his successors created the world’s best phone system.
In modern times, a monopoly was no longer necessary. In 1968, the U.S. Supreme Court allowed an inventor to attach a device to a phone line; in the 1970s, MCI brought competition to long-distance; in 1984, AT&T; began the processing of breaking up that continues today.
Since 1984, long-distance rates have come down and business has expanded. But AT&T; has struggled to adapt Vail’s doctrine of service to a competitive environment. It has made mistakes, but on the whole the company has done well. It remains an organization capable of serving vast industrial and residential needs efficiently.
Now having split off Lucent, which will compete globally in phone equipment, AT&T; “can focus solely on communications services,” says A. Michael Noll, professor of telecommunications at USC. “It will be formidable.”
In fact, AT&T; has a great opportunity to bring technology to customers with the reliability that is its genetic inheritance from Theodore Vail.
The company made a start last week, rushing to market with a new kind of cellular phone that anticipates next year’s introduction of digital personal communications service, or PCS. Consultant William Davidson of Mesa Research, a Redondo Beach firm, sees it as a good sign. The rush to market indicates they’re thinking competitively, Davidson says. “And PCS will allow them to integrate local and long-distance service.”
The stock market, however, remains noncommittal, leaving AT&T;’s shares selling at 11 times anticipated earnings, compared with 18 times for the average New York Stock Exchange company.
The market is watching as AT&T; looks for new leadership. Robert Allen, chairman since 1988, has said he’ll step aside if that’s necessary for the board to bring in a new leader.
“They need an entrepreneur; they should call back Craig McCaw,” says Peter Bernstein, whose firm, Infonautics Consulting, is a 10-minute drive from AT&T; headquarters in Basking Ridge, N.J.
McCaw is the developer of cellular telephony whose company AT&T; bought in 1994 for $11.5 billion. McCaw has gone on to other ventures, but he owns a lot of AT&T; stock. “He’s a good businessman,” says investment manager Brown, “better than many executives I’ve seen at AT&T.;”
Does Wall Street like change at the top? Sometimes it does. Eastman Kodak, another great old company, was trailing in the market three years ago. Then it brought in George Fisher from Motorola as chairman. He got Kodak moving again, and now the stock is at 20 times earnings.
No accident that Fisher’s name is mentioned in speculation about new leaders for AT&T.;
The world has changed. AT&T; used to be a stock to put away and collect the safe dividend. Now, as with the U.S. economy itself, there’s more uncertainty, but also more excitement and opportunity.
