AT&T's comeback is just beginning

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Over at the Strategy Lab Open, the qualifying tournament for MSN Money's Strategy Lab, we've noticed a flood of excellent news on AT&T (T, news, msgs) lately.

And while players love popular names like Google (GOOG, news, msgs) and Apple (AAPL, news, msgs), they're not blind to up-and-comers or, in this instance, a comeback kid.

AT&T has staged quite the rally of late. An 8% gain in the past month caps off a 64% stock-price increase over the past two years. One of the main catalysts has been its merger with Cingular, which became wholly owned by AT&T in December 2006. Since then, AT&T has almost doubled its revenue year over year, and its future growth estimates -- with help from Apple's red-hot iPhone -- have increased dramatically.

AT&T is even attempting to break into the cable television industry with its new product U-verse.

Let's take a closer look with help from our Open players.

A little history

This comeback story really begins on Jan. 31, 2005, when SBC Communications -- formerly Southwestern Bell, one of the 'Baby Bells' created by the AT&T breakup in 1984 -- purchased what was left of AT&T. SBC changed its name to AT&T and adopted the AT&T logo.

Then, on Dec. 29, 2006, the FCC approved AT&T's purchase of BellSouth, with included both Cingular Wireless and Yellowpages.com. The combined company also stuck with the AT&T name, logo and "T" stock symbol.

This "new" AT&T is successfully on its way to becoming a telecommunications powerhouse once again. CEO Randall Stephenson has steered AT&T into the wireless business and has basically abandoned its traditional land-based home-phone-line business. AT&T is even competing in the cable and high-speed Internet markets.

Impressive new numbers

AT&T announced last week that its directors had approved a 12.7% increase in the company's quarterly dividend. That's the largest annual dividend increase in the company's history. The increase will push dividends from 35.5 cents a share to 40 cents a share on a quarterly basis and from $1.42 to $1.60 a share on an annual basis.

With the stock at about $40, AT&T is "trading at a forward price-earnings ratio of 12.5 versus about 16 for the S&P 500 Index ($INX). To match the S&P's forward P/E ratio, T would need to trade up to about $50 per share. I don't see any obvious reason why AT&T should trade at a substantial discount to the market. Closing even half the gap would bring it to $45," writes "Russ," a prominent Strategy Lab Open competitor, in his blog. (Read the full post.)

I definitely think Russ has a good point. AT&T's fundamentals are in check, and their stock definitely has room for growth when you look at the S&P as a benchmark for valuation. (Click here to join the discussion on AT&T.)

Big predictions for 2008

This dividend increase shatters any doubts about AT&T's recent growth, and it almost doubles the 6.8% dividend increase approved in December 2006. The company also authorized a corporate stock repurchase plan of 400 million shares. This represents almost 6.6% of AT&T's shares outstanding -- a huge confidence booster for investors, since buybacks tend to raise the stock price.

In 2008, AT&T expects to deliver the following:

• Continued wireless revenue growth, which will include revenue from its recent acquisition of Dobson Communications -- with its 1.7 million wireless customers. This should, without a doubt, bolster revenue.

• A consolidated operating income margin in the 25%-to-26% range, which would be a 2-percentage-point increase from 2007. This reflects continued wireless growth, increased expense savings from merger synergies and operational initiatives offsetting expected increased expense for deployment of AT&T U-verse services.

• A continued double-digit growth in earnings per share.

• Growth in free cash flow to the tune of $16 billion to $17 billion. (Free cash flow is cash from operations minus capital expenditures.)

• Significant growth with the new AT&T U-verse service. The total number of AT&T U-verse subscribers is expected to reach 1 million by the end of next year.

What's the bottom line?

Well, with AT&T's revived operations and burgeoning growth opportunities, it seems to be back on the right track. Upper management seems to be very confident in AT&T's ability to drive revenue growth in the double-digit range over the next few years.

The company also expects to deliver significant revenues from Yellowpages.com by way of content-based advertising. Revenues from this part of the business are expected to exceed $1.5 billion by 2010, up from the approximately $600 million in 2007.

Since AT&T acquired Cingular, it has increased its wireless customer base by 2 million. And let's not forget that 1.1 million of these new customers were acquired via the iPhone, which went on the market June 29. The iPhone has proved to be a very liquid venture for AT&T, and it expects continued revenue growth from iPhone sales though 2012 -- when its agreement to be the exclusive network offering the iPhone expires.

Jeff Kalnitz -- another Strategy Lab Open competitor -- sheds some basic, but important light on AT&T's incredible benefit from the iPhone deal: "The difference in the AT&T stores before and after they found the Apple religion is absolutely astonishing. Everything Apple touches shines with a sheen that looks a lot like a shiny gold bar." (Read full post.)

Jeff makes a simple point, and it shows you where AT&T is headed. Its decision makers know where the future is, and they are willing to make the sacrifices in order to get there. Yes, some people might say that AT&T is just lucky to have attached itself to the iPhone, but let's be honest -- there was no luck involved. AT&T saw an opportunity to bulldog its way into a top spot in the wireless market and took the chance. (Click here to join the discussion.)

Say what you want about AT&T, but one simply cannot argue with cold, hard facts. AT&T's revenue has increased almost 93% to $30.1 billion during the third quarter of 2007, significantly up from $15.6 billion during the same quarter last year. The company is moving fast and making right moves at that.

What is all this talk about U-Verse?

U-verse is the name for a package of services provided by AT&T including cable television, Internet access and eventually voice-over-Internet telephone service. AT&T hopes to eventually become a major competitor with the large cable providers like Comcast and Adelphia. U-verse is currently being offered to prospective customers in the company's Southeast region. It's expected to be deployed to approximately 30 million residences across 22 states by the end of 2010.

AT&T says that it anticipates that U-verse will represent a multibillion-dollar revenue stream by 2010.

Strategy Lab Open competitor "RD's Picks" is a little skeptical of AT&T's U-verse projections:

"Is it feasible to reach 30 million homes by 2010? Let's look at the numbers. That gives them two years or roughly 500 workdays. That means they need to reach 60-thousand homes per day. Not sure how many installs a technician can do in one day, but Verizon FiOs (Internet service) took about four hours. Ballpark, they need 30,000 techs doing installs -- although it may go much faster in apartment and condo buildings. That's a lot of technicians running around in AT&T U-verse vans, but it should be feasible." (Read the full blog post.)

"RD's Picks" has a good point on the U-verse projections; they may be a tad bit on the lofty side. But AT&T has done some pretty amazing things over the last couple of years. And we know one thing for sure -- they are going to give it a valiant shot.

What do you think about AT&T's comeback? Is it going to last? Will the company be able to break into the cable business? Will it perish if it's dropped as an iPhone provider after the five-year exclusive-carrier agreement is up? To join the discussion and express your ideas and opinions, click here.

Ken Kam is one of the founders of Marketocracy.com, which along with InvestorPlaceBlogs.comhosts the Strategy Lab Open, a qualifying tournament for MSN Money's Strategy Lab. He's also the defending Lab champ.