Source: PaxForex Premium Analytics Portal, Fundamental Insight
AT&T's stock price increased 4% on April 21 following the telecom giant's Q1 earnings report. It was AT&T's first earnings report since the spin-off of Warner Bros. Discovery, which was completed on April 8 and finally put an end to the upside-down media expansion plans.
AT&T's revenue dropped 13 percent YoY to $38.1 billion, $190 million below analysts' forecasts. The decline reflects the spin-off and sale of DirecTV, Vrio, Xandr, and Warner Bros. Discovery (WBD) during the past year. Excluding these effects, AT&T's standalone revenue increased 2.5% to $29.7 billion. Adjusted earnings were down 9% to $0.77 per share, but still, surpassed the analysts` consensus by eight cents.
These numbers were mixed, but the market reaction suggests that investors are once again starting to warm to the "new" AT&T. Can AT&T be a solid, income-producing value investment in this difficult market?
AT&T's first-quarter numbers have had a lot of buzz about its recent asset allocation. Nevertheless, its core wireless business continues to grow.
AT&T's wireless revenues rose 5.5% YoY to $20.1 billion, and its total number of postpaid subscribers rose 4% to 67.5 million. The company acquired 691,000 postpaid subscribers during the quarter, the highest net subscriber additions in the first quarter in a decade. Postpaid subscriber churn of 0.79% was up scarcely from 0.76% a year earlier, but still down from 0.85% postpaid subscriber churn in the fourth quarter.
During the report, CEO John Stankey explained the strong growth rate as "strong network performance, simplified offerings, and improved customer service." Stankey also said AT&T is "confident" that it can "continue this momentum in a disciplined way."
Regardless, the wireless segment operating income still declined 3.2 percent year over year to $5.9 billion. Costs climbed 9.5 percent to $14.2 billion as the company shut down its 3G network, increased equipment costs, and incurred large expenses related to the inclusion of HBO Max in its wireless projects. AT&T anticipates keeping these packages even though WBD is now an independent company, but WBD will bear all the costs of developing new content.
AT&T's wireline business, which is transitioning from old cable and DSL connections to faster fiber-optic networks, has performed less impressively. Total broadband connections rose 0.6 percent year over year to 15.5 million, while fiber-optic subscribers grew 21 percent to 6.3 million.
That growth rate looks solid, but weakness in the business wireline segment -- which the company blames on delayed government orders -- offset growth in the consumer wireline segment.
Revenue in the consumer wireline segment rose 2 percent to $3.2 billion and operating income rose 3.3 percent to $317 million. But revenue in the business wireline segment fell 6.7 percent to $5.6 billion and operating income fell 20.5 percent to $859 million.
CFO Pascal Desroches expects that the business wireline segment will "recover later this year" when the U.S. government passes a federal budget, but it will likely remain weaker than the consumer wireline segment.
Before WBD's spin-off, AT&T projected that its revenues would grow in the low single digits (on a pro forma basis) in 2022 and 2023. The company expects its broadband business -- led by fiber-optic expansion -- to grow faster than its wireless business in both years.
The company plans to increase capital spending from $20 billion in 2021 to $24 billion in 2022 and 2023 to expand its 5G and fiber networks. But even with the increased spending, the company expects its adjusted earnings per share (EPS) to grow 0%-2% in 2022 and 2%-7% in 2023.
AT&T also expects to lower its net debt to adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) ratio from 3.1 at the beginning of 2021 to 2.5 by the end of 2023. Taking DirecTV and WBD off the company's balance sheet should make that goal easier to achieve.
AT&T restated most of these long-term goals, which could make it more comparable to Verizon, during its teleconference. Its projected dividend yield of 5.7% also remains higher than Verizon's 4.7%.
Stankey said AT&T's Q1 report marked the beginning of a "new era" for the telecom titan. That would certainly be true if the company met its growth targets for 2022 and 2023, but it still faces stiff competition from Verizon and T-Mobile in the telecom market.
AT&T's high yield and low forward P/E ratio of 9 should limit the stock's downside potential, but it probably won't rise until it confirms it can reach its enterprising goals. Investors should stick with AT&T if they already own it, but they should think of buying other dividend stocks before opening a new position in this slow-growing telecom giant.
As long as the price is below 21.90, follow the recommendations below:
- Time frame: D1
- Recommendation: short position
- Entry point: 19.40
- Take Profit 1: 18.75
- Take Profit 2: 17.95
Alternative scenario:
If the level of 21.90 is broken-out, follow the recommendations below:
- Time frame: D1
- Recommendation: long position
- Entry point: 21.90
- Take Profit 1: 22.65
- Take Profit 2: 24.15
