AT&T vs. AT&T Wireless

AT&T reported this morning that the company earned more than $1.7 billion in operating profits in the second quarter of this year. Earnings per share were slightly better than what analysts expected and better than the second quarter of 1999. On this rosy-sounding news, AT&T stock closed at about $34 per share, higher than its 52-week low of $31 1/4 but well below its high of $61. Not exactly a moonshot, but still AT&T is having its best day in quite some time. Certainly things sound better than they did a couple of months ago, when the company’s stock got slaughtered after it warned that earnings growth for the year was slowing.

As it happens, part of AT&T’s good news today was that the wireless division has announced its first earnings, apparently ahead of schedule. There is a tracking stock for the wireless division (with the ticker AWE; AT&T’s ticker symbol is T), and those shares rose about $1 1/2, to $28 1/2–still a bit less than where they ended the day of the AWE IPO. Interestingly, AT&T is valued by the market at about $105 billion, while its wireless division is valued at $65 billion. This seems out of whack when you consider that the wireless division contributed only about 15 percent of AT&T’s overall revenue for the quarter. Does this mean T shares are undervalued or AWE shares are overvalued? Or both?

Tracking stocks, which have become increasingly popular, let investors buy into a particular division of a company without the company actually having to spin the division off. For the investor, the motivation is betting on a segment of a company’s business that seems sexier than the rest of it–the high-growth wireless business, in this instance. For the company, one motivation is to raise cash from investors who would be unlikely to fork over for more plain old shares of T. In this case, AT&T offered the public $10 billion of new shares under the ticker symbol AWE. This stake represents roughly 17 percent of AWE; the rest of its shares are owned by AT&T.

So, given this curious state of affairs, is it possible that AWE is really a better long-term bet than T? How you answer essentially depends on where you see the future of telecom going, and how soon you expect that future to arrive. Obviously AT&T is still a profitable company, and its beleaguered long-distance business alone earns way more than its wireless unit. But AT&T is in the process of radically transforming itself, supposedly repositioning to rely less on long-distance and more on, for example, broadband services. A case can be made that such a behemoth will have a hard time transforming fast enough to beat out various new competitors. The earnings-slowdown surprise earlier this year left the impression that among those who couldn’t figure out what was going to happen to AT&T were the people who run the company. In a conference call this morning, Salomon Smith Barney telecom analyst Jack Grubman mused that it seemed likely that T’s share price was partly hobbled by a lack of guidance from the company on its potential for growth in 2001. In other words, even if AT&T is drastically undervalued, it’s going to take more than one quarter’s good news for that to change.

AT&T has reiterated that it plans to spin off the wireless unit, but when that happens it will effectively increase the number of AWE shares–possibly distributed to current holders of T–which could make even its current price harder to support in the short term. Still, the unit actually posted promising numbers and does seem to have a legitimate growth story. So, for the moment at least, the market seems much more confident in AWE’s potential than in Ma Bell’s.