Source: PaxForex Premium Analytics Portal, Fundamental Insight
Over the past two years, AT&T has been actively restructuring its business by divesting its non-core assets and initiating spin-offs of DirecTV and WarnerMedia. The company aimed to reset its focus and prioritize upgrading its 5G and fiber networks, positioning itself for stronger competition in the telecommunications industry.
A significant milestone in this plan was the merger between WarnerMedia and Discovery, resulting in the formation of Warner Bros. Discovery (WBD 0.16%). The transaction was successfully completed on April 8, 2022, with AT&T investors receiving 0.241917 shares of WBD for each AT&T share they held. However, since both stocks began trading separately on April 11, both AT&T's and WBD's stock prices have experienced declines, with AT&T's stock falling 25% and WBD's stock dropping 47%.
The "new" AT&T initially impressed investors with strong growth in its wireless business, gaining nearly 2.9 million postpaid phone subscribers in 2022 and expanding its fiber networks. However, this growth was dampened by the underperformance of its business wireline segment and the loss of non-fiber broadband customers. Although AT&T initially projected $20 billion in free cash flow (FCF) for 2023, it later revised this forecast down to $16 billion. In the first quarter of 2023, the company generated only $1 billion in FCF due to increased expenses related to 5G and fiber.
The sluggish FCF growth raises concerns about AT&T's dividends and expansion plans, and the prospect of rising interest rates led investors to seek more conservative income investments. Despite its seemingly attractive valuation at six times forward earnings and an impressive forward yield of 8.3%, three other red flags could limit its short-term gains.
- Amazon's Potential Entry into the Wireless Market
In early June, there were reports suggesting that Amazon (AMZN) might introduce wireless plans at a remarkably low price of $10 per month, possibly even free for its Prime members. The company allegedly engaged in discussions with major players such as Verizon (VZ), T-Mobile, and Dish Network to develop this service and negotiate the best wholesale prices possible.
However, Amazon later refuted these rumors, and T-Mobile clarified that there were no active discussions regarding the integration of its services into Amazon Prime. Nonetheless, the idea that Amazon could potentially enter the mobile market in collaboration with one of AT&T's primary competitors raised concerns. This was especially significant as the major U.S. carriers (AT&T, Verizon, and T-Mobile) were still embroiled in a price war that was squeezing their profit margins. The support of Amazon could easily tip the scales in favor of AT&T's rivals.
- The CFO's Warning about AT&T's Wireless Business
AT&T's wireless segment demonstrated growth by adding 424,000 postpaid phone subscribers in the first quarter of 2023, extending its streak of achieving at least 400,000 postpaid phone subscribers for 12 consecutive quarters. However, this streak might come to an end in the second quarter. During a Bank of America conference in late June, AT&T's CFO Pascal Desroches cautioned that the company would likely only add about 300,000 postpaid phone subscribers in the second quarter, significantly below the consensus forecast of 476,000 net additions.
While AT&T's performance still surpassed Verizon, which added only 201,000 postpaid phone subscribers in 2022 before losing 127,000 subscribers in the first quarter of 2023, doubts are increasing about AT&T's ability to reach its targeted $16 billion in free cash flow (FCF) for the year, despite Desroches' insistence that it is achievable.
- The Lead-Sheathed Cable Controversy
Both AT&T and Verizon were recently brought under scrutiny by a Wall Street Journal report, alleging that the two companies exposed their workers and the environment to toxic lead-sheathed copper cables. Analysts at Goldman Sachs and Morgan Stanley estimated that AT&T might face a cost of up to $4 billion to replace these legacy cables.
In response to concerns over lead-covered cables, AT&T stated that these cables comprised only around 10% of its total copper network footprint. The majority of the network, about two-thirds, was either buried or in conduit, with the rest consisting of aerial and underwater cables. The removal costs would vary depending on the specific environment, as indicated by the company.
Raymond James analysts estimated the total removal costs to fall between $264 million and $1.2 billion, spread out at approximately $84 million per year. While this amount represents only 0.07% of AT&T's projected revenues for the year, the ongoing coverage of this issue could potentially damage AT&T's brand reputation and weigh down its stock price.
AT&T is scheduled to release its second-quarter earnings report on July 26. It is expected that the report may reveal weaker-than-expected wireless numbers while providing further updates on the status of the lead-covered copper cables.
On a positive note, AT&T might be able to counter some of the negative sentiment by demonstrating higher-than-anticipated free cash flow (FCF) growth, proving its ability to achieve the targeted $16 billion FCF. However, even if this milestone is reached, AT&T's stock may continue to trade at a discount in the current uncertain market until additional positive indicators emerge.
While the price is below 16.00, follow the recommendations below:
- Time frame: D1
- Recommendation: short position
- Entry point: 14.43
- Take Profit 1: 13.30
- Take Profit 2: 12.00
Alternative scenario:
If level 16.00 is broken-out, follow the recommendations below:
- Time frame: D1
- Recommendation: long position
- Entry point: 16.00
- Take Profit 1: 17.00
- Take Profit 2: 18.00
