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Author: marcelf One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 1068  
Subject: Sent to my daughter Date: 7/3/2006 7:57 AM
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I just sent this to my daughter who asked my opinion on what she should do with here BellSouth shares. I thought I'd share with y'all.


Alright, so I took a deeper look into the BellSouth/AT&T situation.
Overall, pretty much all my findings indicate that you likely should hold onto your stocks.

IMPORTANT: Now, there is a golden rule that you should not have a single investment any higher than 10% of the total amount of your portfolio. Consequently, if BLS currently represents 90% of your overall portfolios, it might be prudent to diversify. No one ever knows when a skeleton is going to be discovered in a closet and you need (must) protect yourself against that.

SUMMARY: It appears to me that the BellSouth stock is overpriced while the AT&T one isn't. It might therefore appear that you should sell the overpriced stock, right? Not in this case as the parity for the exchange is already established at 1.325 shares of AT&T for each share of BLS that they will get from you. Therefore, you will get paid by actually a much stronger currency than the one you currently own.

Now, let's compare the two companies over the past 15 years...

During that period, the growth in sales (calculated exponentially) has been 11.83% for T and only 2.43% for BLS.
The profits grew at a pace of 13.35% for T and 5.27% for BLS.
In the mean time, the AT&T stocks has diluted tremendously by the emission of new shares, degrading the per/share values at a pace of 7.65% yearly, while the float of shares for BellSouth has actually decreased at a pace of 0.37%, therefore not diluting the per/share results at all.

The "per share" comparison between the two companies is as follows:
Sales/share grew at 4.63% for T and 2.81% for BLS.
Cash Flow/share grew at a pace of 4.05% for T and 3.41% for BLS.
Earnings/share grew at a pace of 5.29% for T and 5.66% for BLS.
The Book Value/share grew at the rate of 4.63% for T and 4.69% for BLS.
If we incorporate the dividends paid to the book value, the Book Value with Dividends/share grew at 9.03% for AT&T and 8.64% for BLS.

Currently, the Dividend/share paid are 4.80% for T and 3.20% for BLS.

All compounded through the family secret recipe, the companies grew at a pace of 8.16% for AT&T and only 4.78% for BellSouth. In the mean time, the stock price went up at a pace of 1.17% for AT&T and 6.75% for BellSouth.

All these numbers are a clear indication that the AT&T shares are a much better holding than the BellSouth ones. As you should trade your BLS very soon for T shares, you should be just fine and this is quite likely a good deal for you, especially on the long run. I do believe that AT&T is underpriced and BellSouth overpriced. Of course, this doesn't mean that the market is not going to react in the opposite direction from the logic approach. On the short term, it typically does, go figure. On the long haul, on another hand, it is almost a given that the shares of the AT&T companies will grow higher.

My target price for 2,011, all staying equal in the growth department, are $47.39 for AT&T (currently $27.89) and $43.21 for BellSouth (currently $36.20). A clear choice if you ask me.

OTHER CONSIDERATIONS:
Diane Ackerman sold only a fraction of her shares. She is holding on the remaining. Now, if somebody knows about what is likely to be best, she probably is the one, wouldn't you think?

What I really do not like about either company, is the fact that the "insiders" (people managing the company) own only a very, very small amount of shares. The numbers are almost identical for both companies, around 1/10th of 1%. To me, this is a very serious red flag showing that the management would never hesitate between their interests and the stockholder's.

The "smart Money" thinks that the stock price for both companies is likely to go south in the short term. I can see that by the number of "short" sales and the current amount of shares that are currently shorted. The numbers for both companies are increasing, which is a clear sign on where the "smart money" bets are sitting.

Alright. I probably overestimated your curiosity. I am attaching the files, but they are not very friendly for anybody else but me. If you have any questions, you can always call, right?
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