Battered TV and Advertising Industries Undervalued

The Morningstar US Communication Services Index has bounced back nicely along with the broader market, gaining 25% since the end of March versus a 23% gain for the Morningstar US Market Index. Facebook, which accounts for about 18% of the sector index, has been the star performer, gaining about 43% over this period and shooting to a 10% premium to our fair value estimate. Traditional telecom stocks, less affected during the market sell-off, have underperformed. AT&T and Verizon, which account for a combined 15% of the index, have gained only about 4% each. Of the two telecom giants, AT&T is more attractive, trading at an 18% discount to our fair value estimate and providing a 7% dividend yield that we believe is sustainable. AT&T has made numerous strategic missteps over the past few years, but we expect it will adhere to a more prudent path under new CEO John Stankey.

The sector has followed the market thanks to winners like Facebook. - source: Morningstar