AT&T Valueline Outlook

AT&T Inc.’s operating environment appears to be getting chillier. Though the wireless and corporate/business units continue to perform well in the current climate, the telecom company’s traditional, consumer-oriented phone division is being adversely affected by the slowdown in the
U.S. economy. In fact, access-line losses have accelerated lately (the line base contracted a greater-than-expected 7.4% on a year-over-year basis during the fourth quarter), due to an uptick in nonpayment rates and service disconnections. This, coupled with heightened competition from wireless carriers and cable VoIP providers, is taking a toll on once-core wireline voice revenues.

In the meantime . . . Pricing within the wireless arena is softening, as the major service providers
aggressively look to shore up their customer bases. In an industry-transforming move, AT&T, Verizon, and T-Mobile recently introduced rival, $99.99-a-month unlimited calling plans. This decision will, we think, ultimately put pressure on most carriers’ results. And the new pricing
plans will probably lead to further rate cuts down the road.

That said . . . We believe that the company will remain in a growth mode over the next few ears. Although prices seem to be coming down, AT&T’s mobility business is still thriving, thanks to share advances (mostly at the expense of Sprint) and the success of Apple’s iPhone. (The company is the exclusive U.S. carrier for the revolutionary handset.) Moreover, broadband
penetration levels continue to rise. And the firm’s new premium, Internet Protocol based
TV service, U-verse, is quickly gaining traction in the marketplace. Indeed, management expects the service, which is meant to compete with Verizon’s FiOS offering and cable operators’ all-in-one packages, to have more than one million subscribers by the end of 2008.

At the current quotation, this highprofile issue has appeal as both a short- and long-term olding. Despite worsening business conditions, AT&T has enough growth drivers in place to support
healthy profit increases in 2008 and beyond. What’s more, the company continues to pay a generous dividend, which should please income-oriented investors.
Justin Hellman March 28, 2008 (Valueline)