No. of Recommendations: 11
Call me crazy for even suggesting a telcom company (that isn't LVLT, of course), but it looks to me like Altel just entered value territory. One might also make an argument for SBC as well. Let me lay out the argument for Altel.

Altel is a wireless and wireline telecommunications company serving primarily rural telcom markets. Here is a graphic of Altel's wireless and wireline footprint:

Altel has been the best performer of the local phone companies over the past several years, and it has been the only telcom company I'm aware of to avoid getting axed by Mr. Market--that is until now. It looks to me like the debt problems of all the other telcom companies, but especially Worldcom, have started to taint Altel as well. Does Altel deserve to be whacked? Let's look at the numbers.

EPS AVG PE Price/Sales Price/Book Net Margins Debt/Equity ROE

Current $2.92 16.2 2.0 2.6 11.7 0.65 16.2
Dec-01 $3.34 17.7 2.5 3.4 13.8 0.69 18.8
Dec-00 $6.20 10.5 2.8 3.8 27.8 0.91 38.6
Dec-99 $2.47 30.0 4.1 6.2 12.4 0.89 18.6
Dec-98 $1.89 26.4 3.2 5.2 10.1 1.07 16.1
Dec-97 $2.70 13.2 2.3 3.4 15.6 0.85 23.1
Dec-96 $1.52 20.5 1.8 2.8 9.1 0.84 14.0
Dec-95 $1.85 14.7 1.8 2.9 11.4 0.91 18.4
Dec-94 $1.43 19.4 1.9 3.5 9.2 1.14 16.8
Dec-93 $1.39 19.5 2.4 3.6 11.2 1.03 17.0
Dec-92 $1.25 17.0 2.1 3.4 10.9 0.79 17.7

10YrAvg $2.40 18.9 2.5 3.8 13.2 0.91 19.9

Earnings have been fairly consistant and have risen in each of the last four years (adjusted earnings for 2000 are $2.55 after deducting a one time gain). At a current PE of 16.2, Altel trades at a slight (~14%) discount to its ten year average PE of 18.9. The current P/S and P/B ratios are near ten year lows. One of the things I like about Altel is the consistantly high ROE, averaging nearly 20 over the decade. Looking at Altel from a relative valuation, it looks like it is selling on the low end of its historical averages.

On of the things that has scared folks away from telcom is debt. It looks to me like Altel has no serious debt problem. As of the end of the first quarter they had $3.685 billion in long and short term debt. One way to determine whether debt is too burdensome is to look at the ratio EBIT to interest expenses including minority interest. The EBIT interest coverage ratio for each of the past five years beginning in 2001 and going back to 1997 was 5.9, 9.2, 4.4, 3.7, and 7.4 respectively. In otherwords, Altel has no trouble covering its interest obligations. Perhaps some of the recent price drop is the result of Altel announcing an additional $1.25 billion debt offering. This would raise its total debt obligation to just under $5 billion. If anything is going to scare one away from Altel it would be this debt burden.

Now lets turn to valuing Altel. The annual dividend of $1.36 is currently yielding 2.9%. The earnings yield, currently at 6.3%, is above the long bond by about 100 basis points. If one were to be particularly stingy, one might wait for Altel to drop under $30, which would give a dividend yield of about 5%. I doubt that this will happen given its long track record of double digit growth. Using the current EPS of $2.97 and assuming that earings will continue to grow at the 9% they have averaged these past ten years, then we can expect eps to grow to just over $7 ten years from now. Assuming a PE multiple of 19 and accmulated dividends of $13.60 I get a future value of just under $150. Discounting this back to the preset price of $47.27 I get an expected annual rate of return of 12%. Not to bad in the current environment.

Next, I will do a DCF analysis, but before I do so let's look at owners earnings for the past decade.

ALLTEL CORP (AT ) Net Depr & Capital Owners
Income Amort Spending Earnings

Dec-92 228.6 244.6 -367 106.2
Dec-93 262 272.4 -426 108.4
Dec-94 271.8 362 -596 37.8
Dec-95 354.6 409.8 -523 241.4
Dec-96 291.7 424.1 -464 251.8
Dec-97 507.9 450.8 -546 412.7
Dec-98 525.5 707.1 -869 363.6
Dec-99 783.6 862.2 -1006 639.8
Dec-00 1965.4 988.4 -1165 1788.8
1-Dec 1047.5 1167.7 -1232 983.2

Growth Rate 16.7% 21.0% 17.7% 19.0%

Owners Earnings 983.2

Altel has managed to grow owners earnings at an impressive 19% over the past five years, while net income has grown at an annualized 16.7% during that same period. For the purposes of our DCF analysis I will use owners earnings of $983 million, a ten year growth rate of 9%, and a discount rate of 9% and 12%. Using these figures I get an intrinsic value of $63.50 using the 12% discount rate and $79 using the 9% discount rate. I think that one can safely assume that Altel is worth between $60-80 using a reasonable set of assumptions. If one wanted to get very conservative one could lower the long term growth rate to 5%. At this rate, Altel is worth $47.50 to $58.50 using a 12% and 9% dicount rate respectively. In otherwords, using the worst case projections presented above, Altel's current price assumes that the company will destroy value at a rate of 7% annually in perpetuity.

Two final metrics to look at at the price the shares should fetch if the PE returns to its ten year average, and the price it is likely to fall to if it reaches a ten year low PE ratio. These are $56.50 and $23 respectively.

In summary, I think that the evidence shows that Mr. Market is unfairly discounting Altel shares by at least 20% and by as much as 40%. While the discount has not yet reached 50 cents on the dollar, the shares seem to me to be attractive at the current price. I am seriously considering buying half a position tomorrow and accumulating a larger position should the shares continue their retreat.

I'd appreciate any feedback.

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