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AT&T Stock: Undervalued, with a Value-Unlocking Catalyst

In current market conditions, it’s unlikely that investors will find several stocks trading at a forward price-to-earnings-ratio below 10. AT&T (T) stock is one such name, and has been an under-performer in the last 12 months.

However, it seems like a reversal is around the corner. I am bullish on T stock with the impending media business demerger being a key upside catalyst. (See AT&T stock charts on TipRanks)

In May 2021, AT&T announced a $43-billion deal to separate from, and merge WarnerMedia with Discovery (DISCA). The deal is expected to close in the middle of 2022, with Discovery shareholders owning 29% of the new company.

It’s worth noting that the merged entity is likely to have an annual content spending of $20 billion. This is a key factor that is likely to drive healthy subscriber growth. Overall, it seems that the demerged business will result in value unlocking.

Another point worth noting is that T stock currently has an annualized dividend of $2.08. The company announced a dividend cut of 50% once the demerger is completed. This further depressed T stock sentiment.

However, it seems likely that value unlocking will more than offset the dividend cut factor. This makes the stock attractive.

5G Likely to Drive Communications Segment Growth

Between 2016 and 2020, AT&T invested $105 billion in its wireless and wireline business. The company’s 5G network covers 230 million Americans, in 14,000 cities and towns.

The Communications segment already seems to be gaining growth traction. For Q2 2021, the company reported 789,000 post-paid phone net adds. The Mobility segment had a healthy operating income margin of 31.7%, and EBITDA service margin of 55.9%.

With work-from-home likely to be the new normal even after the pandemic, demand for faster connection is likely to rise. This is positive for the company’s Communications segment.

Even in the Consumer Wireline segment, the company has a penetration of more than 36%. On a year-over-year basis, penetration has increased by 500 basis points.

Deleveraging Will Improve Fundamentals

With the impending demerger, AT&T is likely to reduce its debt by $43 billion. Another point to note is that for the current year, the company has guided for free cash flows of $27 billion.

Therefore, AT&T has ample financial flexibility after capital expenditures to pursue dividends and deleverage. As a matter of fact, the company’s Telecom division expects to have the best leverage among its peers once the demerger is completed.

Wall Street’s Take

According to TipRanks’ analyst rating consensus, T stock comes in as a Hold, with five Buys, five Holds, and two Sells assigned in the past three months.

The average AT&T price target is $31.50 per share, implying 15.5% upside potential from current levels.

The Final Verdict

AT&T seems to have made the right move with the planned demerger. Individual segments are likely to create value with 5G growth, and the continued momentum in live streaming.

The stock therefore seems to be trading at attractive valuations and a reversal seems likely. It would not be surprising if T stock is a market performer or outperformer in the coming quarters.

Disclosure: At the time of publication, Faisal Humayun did not have a position in any of the securities mentioned in this article

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