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Stock Analysis & Ideas

AT&T Stock: Cheap, but There Is Uncertainty

AT&T (T) has been around for quite a long time. It is one of the largest telecommunication providers in the world and operates through three main segments, namely the Communications segment, the WarnerMedia segment, and the Latin America segment. The company has disappointed investors in the last few years with its depressed valuations.

Shares are down 38% in the past five years (unadjusted for dividends), and the company is in a restructuring mood these days. Does this restructure merit a Buy? Maybe. Considering the fact that it is becoming a leaner organization by making some significant changes in its strategies, green shoots might be in the offing.

Once the economy is back to operating in full force, its business could look much stronger than it does at present. Right now, we believe the stock is a Hold.

AT&T is actively engaged in providing telecommunication, media, and technology services worldwide. It also sells various accessories through the company-owned stores as well as through agents and third-party retail stores. Many investors view it as a retirement stock as AT&T has a history of paying its investors a juicy share of dividends. 

Walter Piecyk of LightShed Partners is one of the analysts who has given a buy rating to AT&T a few months back. Piecyk had stated that AT&T has now pulled out of all the “bad stuff,” and the same is evident from its rising free cash flows and increasing growth rate which closely matches T-Mobile and Verizon.

He further mentioned that if the company’s management does well in the new era of 5G connectivity and delivers on growth that’s equal or better than the rivals, then AT&T shouldn’t trade at a discount.

Planning a Turnaround

AT&T used to be a blue-chip stock years ago. However, the company took on significant debt for expensive acquisitions, and the stock market has punished it. In 2015, the company bought DirecTV for $49 billion to expand its pay-tv business.

Secondly, in 2018 it acquired Time Warner for $85 billion to build a streaming media ecosystem. Due to both of these events, the company’s long-term debt skyrocketed. Lastly, its attempts to challenge Netflix and Disney in the streaming video market also didn’t prove beneficial.

Now, things have been changing for AT&T as the company is planning a turnaround in order to rectify those past mistakes. Last May, it decided to spin off most of its Time Warner’s media assets and then merge those with Discovery (DISCA) to create a stand-alone company by mid-2022.

Later, in August, it spun off DirecTV to form a new stand-alone company in which it retained a 70% stake. Besides this, the company had also divested several of its smaller businesses to make itself leaner.

AT&T believes that through these steps, it can free up a chunk of its resources and then channel those for the expansion of its 5G network. 

Though all these steps appear to have been working in favor of the company, AT&T would still require years to become a reliable long-term investment again.

Improving Financials

AT&T was suffering from a massive debt burden previously. However, as the company is aggressively planning to cut down on its debts, its cash flows have shown some improvement. A

T&T generated consolidated revenues of $39.9 billion in the third quarter of 2021. The Mobility & Consumer Wireline sectors of the Communications segment saw 7% and 3.4% revenue improvements, respectively, while the WarnerMedia segment revenues improved by about 14%.

Moreover, the adjusted EPS also increased to $0.87 from $0.76 achieved a year ago. AT&T expects an improvement in its full-year adjusted EPS and has a free cash flow target of $26 billion. 

Expansion in 5G Segment

Many companies are making investments into 5G infrastructure these days as the demand for 5G has been building up gradually, especially since the last few years with the advent of hybrid work culture among organizations. AT&T used to be one of the two largest wireless carriers in America but slipped to the third position after T-Mobile took over its position.

T-Mobile low-band 5G networks offered about 33% more geographic coverage than Verizon and AT&T’s combined 5G networks did and claimed its 5G network covered 92% of all interstate highways miles across America, compared to 68% for AT&T. Thereby sensing fear, AT&T started aggressively investing its wireless business and 5G networks infrastructure.

The company is acquiring significant amounts of 5G mid-band spectrum assets these days and has been continuously rolling out 5G-C and fiber network access to ever-larger segments of the country.

Wall Street’s Take

Turning to Wall Street, AT&T stock comes in as a Moderate Buy. five out of nine analysts have given T stock a Buy rating, and four have suggested a Hold.

The average AT&T price target of $29.27 represents 12.1% upside potential.

Conclusion

Though AT&T has been trying to rectify its past mistakes, there is no guarantee that these efforts would actually do away with all the damages that it had inflicted upon itself constantly over the past few years.

However, the stock is now pretty cheap, and one can keep holding onto its shares as there is more potential for the stock to go upside than going downside. Moreover, the WarnerMedia divestment may also turn out to be favorable for the company’s operations in general. The dividends paid are the added bonus one would receive.

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