Source: PaxForex Premium Analytics Portal, Fundamental Insight
AT&T stock rose 8% last week after the company released its Q3 report. Revenue from continuing operations fell 4% year over year to $30.0 billion, which still beat analysts' expectations by $140 million. Excluding the spin-off of the U.S. video business in July of this year, the company's revenue rose 3% year over year on a standalone basis.
The company's adjusted earnings from continuing operations rose 3% to $0.68 per share, which also beat the consensus forecast by seven cents. These key numbers indicate that AT&T's business is stabilizing after the sale of DirecTV and WarnerMedia. But is its stock poised for recovery after losing nearly a fifth of its value in the past three months?
AT&T's purchases of DirecTV in 2015 and Time Warner in 2018, as well as other smaller media companies, have turned it from a telecommunications company into a media giant. But AT&T struggled to balance all those spinning plates. They collapsed when a pandemic, stiff competition, and other macroeconomic factors disrupted its plans to build a media empire based on its wireless and broadband business.
Over the past two years, AT&T has corrected those mistakes by selling DirecTV in a deal with TPG, merging Time Warner with Discovery to create Warner Bros. Discovery, selling its small media assets, and selling some of its real estate.
Before completing the WBD spin-off in April, AT&T told investors that the company would be able to increase its annual revenue from 2022 to 2024 at a low-single-digit CAGR (compound annual growth rate), and increase adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) and adjusted earnings per share at a mid-single-digit CAGR. These stable estimates suggested that the "new" AT&T would grow at a comparable pace to Verizon, which had not made any large-scale media deals.
AT&T has been posting results as an independent company for three quarters now. Its mobile division, which houses the core wireless segment and generated 70% of its revenue in the third quarter, has consistently increased postpaid phone subscribers and revenue over the past year. In addition, the company has retained its customers with a low subscriber churn rate of less than 1%, and its wireless services EBITDA margin has been consistently growing.
But in AT&T's business and consumer wireline segments, which together generate the remaining 30% of its revenues, things are a little more complicated. Business wireline revenues declined throughout the year due to a decline in demand for traditional voice and data services (especially among government customers), offsetting a slight increase in consumer wireline revenues.
To counter this slowdown, AT&T is expanding its fiber-optic network focused on consumers. This expansion boosted total net broadband additions in the first quarter, but that trend reversed in the last two quarters as non-fiber broadband customer losses (excluding DSL) overwhelmed growth in the fiber business.
Going forward, AT&T plans to aggressively expand its 5G and fiber networks to offset the slowdown in its traditional wireline business. These investments will account for most of the $24 billion capital investment this year.
AT&T expects the strengths of its core wireless business to offset weaknesses for the foreseeable future. The company now forecasts that its adjusted earnings per share from continuing operations will rise to $2.50 "or higher" for the full year, up from a previous forecast of $2.42 to $2.46. Based on these expectations, AT&T stock looks very cheap at seven times earnings this year.
AT&T also reiterated its full-year free cash flow (FCF) forecast of $14 billion (instead of cutting it again as it did in Q2), which should easily cover its $8 billion dividend payout and support a high projected yield of 7.1%. Verizon also trades at seven times this year's earnings estimate and has a 7.1% yield.
AT&T's low valuation and high yield should limit the company's downside potential and make it a safe buy in a bear market for conservative investors. If its wireless business continues to grow and its wireline business stabilizes, the stock could rise again as value investors finally give the riddled AT&T a second chance.
As long as the price is above 16.00, follow the recommendations below:
- Time frame: D1
- Recommendation: long position
- Entry point: 17.60
- Take Profit 1: 18.60
- Take Profit 2: 20.00
Alternative scenario:
If the level of 16.00 is broken-down, follow the recommendations below:
- Time frame: D1
- Recommendation: short position
- Entry point: 16.00
- Take Profit 1: 15.00
- Take Profit 2: 13.00
