Source: PaxForex Premium Analytics Portal, Fundamental Insight
AT&T's stock price fell 8% on July 21 following the release of its Q2 earnings report. On a stand-alone basis -- not including the sale of Warner Bros. Discovery, DirecTV, and other business segments over the past year -- the company's revenue increased 2% YoY to $29.6 billion and beat analysts' forecasts by $130 million.
On the same separate basis, AT&T's adjusted earnings from continuing operations rose one cent YoY to $0.65 per share, which also beat Wall Street expectations by three cents. Those underlying numbers look stable, but a few complicated details in the earnings report scared off the bulls.
Let's dig deeper and see how bears and bulls likely viewed AT&T's latest earnings report, and whether the sell-off after the report was released is a cautionary tale or a buying opportunity.
The bears are pointing out that AT&T's margins have shrunk as the company has lowered its free cash flow (FCF) forecast for the full year. Operating margin fell 50 basis points YoY to 31.2%, and adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) fell 110 basis points to 41.3%. The decline was due to the continued expansion of 5G networks in the mobile segment as well as higher expenses in the wireline division.
The rise in spending was not surprising as AT&T separated WarnerMedia, DirecTV, and other smaller media segments to concentrate on strengthening its core telecom business to compete more effectively with Verizon Communications and T-Mobile.
But during its presentation to analysts in March, AT&T told investors that it could generate $16 billion in FCF for the full year. The company reiterated that goal during its Q1 report in April.
But this time, AT&T sharply lowered its full-year FCF forecast to $14 billion, a drop due to higher-than-expected capital expenditures, higher investments in subscriber growth, and the impact of $1 billion in delayed collections from customers, and lower operating margins for its wireline division.
AT&T could still easily cover its planned dividend payout of about $8 billion through lower FCF. Nevertheless, there is likely concern that AT&T could lower that forecast again if the macroeconomic environment worsens.
AT&T reduced its net debt by about $37 billion during the quarter, but its net debt is still high relative to its adjusted EBITDA of 3.2. That's still well above the target ratio of 2.5 that the company intends to reach by the end of 2023.
Nevertheless, there was plenty to cheer about in AT&T's report. During the quarter, the mobile segment gained 813,000 new postpaid phone subscribers, the strongest second-quarter performance in a decade. The average revenue per user in the mobility segment also increased both sequentially and year-over-year.
Consequently, AT&T raised its full-year revenue forecast for wireless services -- which accounted for 51% of the company's total revenue in the second quarter -- from "3% or better" to 4.5-5%. On the broadband side, AT&T Fiber added 316,000 net connections during the quarter, marking the tenth consecutive quarter in which net connections exceeded 200,000. The company also reiterated its full-year forecast for broadband revenue growth of more than 6 percent.
The rest of AT&T's forecasts remained unchanged. For the full year, the company still expects its revenues to grow in the low single digits and adjusted earnings per share to increase by 0% to 2%. The company maintained its full-year capex target of $24 billion, which will mostly be used to upgrade its 5G and fiber networks, as well as a target of $4 billion to $6 billion in transformation savings.
AT&T looks like a more promising investment after the recent sale of WBD and DirecTV. Its low forward price-to-earnings ratio of eight and a high forward dividend yield of 5.3% should also limit downside potential in this value-oriented market.
The decreasing margins and FCF worry investors, but it is also encouraging that AT&T is again ramping up investments in its core telecom business rather than building a loss-making media empire. Its full-year guidance also suggests that the company will stabilize its business and become more like Verizon in the long run, which trades at nine times projected earnings and pays a slightly lower projected yield of 5.1%.
Thus, AT&T is still a good value play for a bear market or recession. It won't bring rapid growth, but it will be a safe place to hold cash when macroeconomic factors negatively impact the broader markets.
As long as the price is above the 19.00 level, follow the recommendations below:
- Time frame: D1
- Recommendation: short position
- Entry point: 18.42
- Take Profit 1: 17.00
- Take Profit 2: 16.00
Alternative scenario:
If the level of 19.00 is broken-out, follow the recommendations below:
- Time frame: D1
- Recommendation: long position
- Entry point: 19.00
- Take Profit 1: 20.00
- Take Profit 2: 21.00
