AT&T Investment Analysis 21 April 2009 Whitney Burns and Jason Robertson

Stock Price Overview AT&T Price (as of April 7, 2009) $ Week High:$ Week Low$20.90 Average Volume35,438,900 Market Cap B DCF Implied Price $42.39 P/E ratio Price to Book 1.28 Debt to Equity 1.75 Return on Equity 13.63%

Investment Thesis AT&T is a company that is well diversified, driven by strong wireless growth, and significantly undervalued. Thus, proving to be a great investment. 3G & 4G networks, increased use of integrated devices, and consumer interest should support continued growth in data plans and wireless growth In addition, AT&T has a strong competitive advantage: – Brand recognition – Strategic alliances – Premier network – Premier Devices

Holding Period Return Holding Period Return= 9.05% AT&T (T)

Industry Overview The telecommunications industry includes local telephone service, long-distance telephone service, wireless telephone service, paging, internet service, Voice over Internet Protocol (VOIP), and a wide assortment of other competitive products and services Telecom is becoming less about voice and increasingly about text and images The fastest growth comes from services delivered over mobile networks The two biggest factors affecting this industry are technology and regulation

Overview of AT&T In 1984, through an agreement between the former AT&T and the U.S. Department of Justice, AT&T agreed to divest itself of its local telephone operations but retain its long distance, R&D and manufacturing arms. From this arrangement, SBC Communications Inc. (formerly known as Southwestern Bell Corp.) was created Then, in 2005, SBC Communications Inc. acquired AT&T Corp., creating the new AT&T

AT&T With the merger of AT&T and BellSouth in 2006, and the consolidated ownership of Cingular Wireless and YELLOWPAGES.COM, AT&T is positioned to lead the telecommunication industry AT&T is the dominant local phone company in 22 states, serving about 55 million local phone lines and 15 million high-speed internet users. The firm also provides phone and data services to businesses nationwide, notably large corporations. AT&T is the second-largest U.S. wireless carrier with 77 million customers

AT&T’s Competitive Advantage Brand Recognition- synonymous with the best and most reliable telephone service in the world Strategic Alliances- Apple, IBM, NCAA Wi-Fi Advantage- largest access region among carriers Premier Network- Nation’s fastest 3G network, largest coverage and fewest dropped calls WORLDWIDE Premier Devices- iPhone and Blackberry Bold Applications and Content- mobile TV and videoshare

AT&T’s Value Chain Establishing Networks Product/Service Offering Obtain Clients and Subscribers Growth through Technological Advancements Establishing Networks: AT&T differentiates itself from its competitors by offering fast, reliable, and expansive networks Product/Service Offering: AT&T offers its customers superior products and services because of its highly advanced technology and network Obtain Clients and Subscribers: AT&T is targeting undershot consumers who are frustrated with other carriers’ limitations and are willing to pay more for enhancements along the dimensions most important to them Growth Through Technological Advances: AT&T continues to grow its services, by expanding to a 4G network, and products by having alliances with innovative companies such as Apple

Porter’s Five Forces Competitive Rivalry: HIGH Threat of Entry: LOW Power of Buyers: MEDIUM Substitutes: HIGH Power of Suppliers: MEDIUM Substitutes = High: The existence of substitutes increase the propensity of customers to switch Threat of Entry = Low: The industry is very capital intensive with high fixed costs Competitive Rivalry = High: Only a few large competitors Power of Buyers = Medium: Cost of switching carriers is relatively low Power of Supplier = Medium: Losing a supplier or being charged a high cost can negatively impact the company

Risks/Threats to AT&T One potential risk to AT&T is the industry trend of consolidation. As consolidation increases there will be fewer competitors and thus an increase in competitive rivalry. Another threat to AT&T is the possibility of increased government regulation. Regulation has a significant impact on the telecom industry because of its costly effects. Advancement in technologies also poses a serious threat to the telecom industry and companies like AT&T. If AT&T is unable to offer advanced product s and services they are susceptible to losing customers and subscribers resulting in high churn rates. Additionally, a worsening U.S. economy would magnify AT&T’s customers and suppliers’ current financial difficulties and thus could adversely affect the company.

Opportunities Wireless: There has been an increasing trend in wireless growth, domestically and internationally, thereby creating immense opportunities for capturing new market share. U-verse: U-verse has experienced strong sales trends, operational progress and new service features that are bound to lead to success. Aircards: We believe that aircards represent the second largest substantial revenue opportunity for carriers after integrated devices as wireless broadband speeds continue to increase. Machine-to-Machine technology: Wireless chips are increasingly being embedded in myriad electronics products, which create the potential for increasing usage over the medium-term. Integrated devices: We think the most important current driver of wireless revenue growth lies in the potential for increasing penetration of integrated devices rather than subscriber growth. This is because integrated devices provide 1.6 times the ARPU (average revenue per user) of other wireless devices.

Key Competition

Relative Valuation

WACC Calculation

DCF Analysis

Sensitivity Analysis

Sensitivity Analysis (cont.)

Conclusion In conclusion, AT&T is currently undervalued as shows in our above evaluation, due in large part to the current economic situation. We believe that AT&T’s diversified business operations, a strong growth in the wireless segment, other growth opportunities, and a wide array of competitive advantages make AT&T a good stock to buy. Moreover, we believe AT&T’s prospects for future growth are optimistic. All financial instruments are only worth the cash flows they provide to their investor. AT&T has returned value to shareholders of more than $15 billion in 2008 through dividends and share repurchases, the 25 th consecutive annual dividend increase. We believe AT&T will continue to provide these strong cash flows through their higher EPS, constant dividend policy, and capital gain in the markets realization of AT&T’s true value.

Questions?