A Tough Call for AT&T Stockholders


By Robert Barker If you own stock in AT&T (T), you're going to have to make a difficult decision soon. The company is offering to give investors shares in its AT&T Wireless Group (AWE) in exchange for its own outstanding common stock. That means you'll have to decide whether you want to place more of your money on the cellular and mobile-messaging business or keep it on the diversified group of telecom assets in AT&T, which includes a stake in AT&T Wireless.

It's no easy question. So when I saw that Bill Nygren, manager of Oakmark Select Fund (OAKLX), is bullish on AT&T, I wanted to find out why. For one thing, Nygren seems to know something about picking stocks. Since its inception in November, 1996, Oakmark Select -- which Nygren has run since the beginning -- has returned 196%, vs. 99% for the Standard & Poor's 500-stock index. He runs more than $4 billion through Oakmark Select and Oakmark, which he has been managing since last March. He definitely knows telecom and cable, having made a big score playing Tele-Communications and its Liberty Media unit before they were purchased by AT&T.

At yearend, Nygren's funds held more than $160 million in AT&T. It's the No. 4 holding in both Oakmark Select and Oakmark (OAKMX). Here are edited excerpts of our talk:

Q: I gather you're a bull on AT&T. What's the case for the company's stock?

A: Our approach is to look for companies where we believe the intrinsic value of the business is substantially above the current stock price, and where management is running the corporation in a way we think is in the interests of the outside shareholders. We look at AT&T, and we look at analysts' reports on [it]. Whether they're bullish or bearish on AT&T, when they look [at it] piece by piece, separating out AT&T Wireless from the traditional long-distance business, and also separating out the broadband [cable] business...they always come up with numbers that are substantially higher than the current stock price.

Q: Such as?

A: It seems like the bears have numbers that are in the low 30s, and the bulls have numbers that are in the 40s. Given that last quarter, management put this company into a direction of splitting into the different business units, creating equity securities that would match the different business units, we think piece-by-piece valuation will be what governs where AT&T trades. Because of that, we think it's likely that [the stock will trade] at a higher number.

Q: Some time ago, I sat down with a former colleague of yours, Joe Mansueto, founder of Morningstar. I asked him, "Who's the best investor you know?" And your name came up. One reason he gave was your initiative in digging through every document about the cable-TV industry a while back to come up with an asset value on some of those companies. Does this ring a bell?

A: It was probably the Liberty Media spin-off from TCI.... That was a transaction where you had to turn in some of your TCI shares to get Liberty. It was a 600-some page document about the spin-off, and most investors didn't take the time to read it. And it was very rewarding to have spent the time to read the document and do the work to figure out what the value of the assets inside of Liberty Media really was.

Q: Now, if you were an individual investor and held shares in AT&T, would you trade them in for Wireless shares, or would you hang on to your AT&T?

A: I think wireless is a very good business, but it's priced in the stock market like it's a very good business. I just don't see an unusual opportunity in AT&T Wireless. I think the more interesting piece is, what is the market implying that the nonwireless businesses are worth? That would be the traditional telephony and AT&T Broadband. That's the part I'm more comfortable with being undervalued.

Q: Explain, please.

A: AT&T Wireless traded [recently] at $27 a share. That doesn't strike me as overvalued, but it also doesn't strike me as being substantially undervalued. If you subtract out the share of Wireless that you own if you buy AT&T, the market effectively is paying less for the rest of AT&T than they spent on just the two large cable acquisitions.... All of the focus is on how rapid is the decline in the traditional long-distance business. But I believe that the way the market is pricing AT&T and AT&T Wireless, it implies you're not paying much of anything for the traditional phone business.

Q: When did you start building your position in AT&T?

A: We started the position in the third quarter, and we added to it substantially in the fourth quarter. And we have added to it subsequent to yearend as well.

Q: Does it mean anything to you when you consider that NTT DoCoMo (NTDMY) paid about $24 a share for AT&T Wireless, which is now trading above that? You have a smart buyer just recently having paid less than the current market price?

A: Well the price has bounced all over the place. It was $17 and change at yearend. It got as high as $27. At the time DoCoMo and AT&T announced that deal, the price DoCoMo was paying was about a 10% premium to the market. So I don't know how much information you can really extract from that.

Q: Finally, what else are you bullish on?

A: Our largest position and a name that did well for us last year that I think will continue doing well for us is Washington Mutual (WM), the largest savings and loan in the U.S.

Q: What's the case for the stock?

A: It sells for about 11 times earnings. Its basic business is mortgage lending to owner-occupied middle-income homes, which I think is a much lower-risk loan portfolio than where you see most of the financial-services companies today. And, lastly, with their geographic exposure mostly along the West Coast and in the Sunbelt, they have better population growth and, therefore, I believe better sustainable earnings growth than most of the financial-services companies.

Q: Go on.

A: I'm looking at a [price-earnings ratio] lower not only than the market but than most of the financial-services industry, as well. Better than average growth, I believe, and lower than average risk. And each time the Fed cuts interest rates, it ups the analysts' earnings estimates for this year. Because most of their income comes from adjustable rate mortgages...consensus estimates have had to continually tick up as interest rates are cut. Barker covers personal finance in his Barker Portfolio column for BusinessWeek. His barker.online column appears every Friday, only on BW Online.

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