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AT&T: Reasonably Valued, but Track Record Is Inferior
Stock Analysis & Ideas

AT&T: Reasonably Valued, but Track Record Is Inferior

AT&T is an American telecommunications conglomerate, headquartered in Dallas, Texas. It began back in 1878 under the name American District Telegraph Company.

I am neutral on AT&T (T) because the valuation multiple is reasonable compared to historical averages and Wall Street is overall neutral on shares, resulting in a pretty even risk-reward outlook. (See today’s best-performing stocks on TipRanks)

Strengths

AT&T is the largest telecommunications provider in the world and has the largest market share in the USA.

The company provides services like wireless, 5G, and internet fibers for connectivity at home, with special solutions for businesses. It also owns WarnerMedia and HBO Max that allows users to use the premium streaming services through their AT&T connections.

Recent Results

For the third quarter of 2021, the company reported revenue of $39.9 billion, down from the $42.3 billion in the year-ago quarter. However, if U.S. Video is excluded, revenue was up by $1.7 billion, an increase of 4.7% from the previous year, implying that U.S. Video usage has declined.

Despite overall declines in revenue, adjusted earnings per share increased from $0.76 to $0.87, which is a 14.5% increase.

Cash flows came in at $5.2 billion and the dividend payout ratio was 63%. Cash from operations was $9.9 billion, which is a decrease from last year’s $12.1 billion, largely due to CapEx impacts.

Broadband connections appeared to drive revenue, as it grew by a healthy 4.6%. For WarnerMedia, revenue grew by 14% via content licensing and advertising. Of the $8.4 billion in revenue in 2021, $2.2 billion came from domestic subscribers while the rest came from international subscribers.

HBO Max also showed subscriber growth, particularly in Latin America, Spain, and the Nordics. A large portion of HBO Max subscribers are domestic, with 45.2 million of the 69.4 million total subscribers being from the U.S.

Direct-to-consumer subscription revenue came in at $2 billion, which was an increase from the $1.6 billion in the same quarter last year.

Valuation Metrics

AT&T’s stock looks reasonably priced at the moment, as the EV/EBITDA ratio is 7.66x compared to its 5-year average of 7.73x. Furthermore, its price-to-forward normalized earnings ratio is 7.8x compared to its 5-year average of 10.3x, and its price-to-forward free cash flow ratio is 8.1x compared to its 5-year average of 9.7x.

Wall Street’s Take

From Wall Street analysts, AT&T earns a Hold consensus rating based on three Buys, five Holds, and one Sell rating in the past three months. Additionally, the average AT&T price target of $30.75 implies 24.6% upside potential.

Summary and Conclusion

AT&T is a fixture in the U.S. telecommunications industry and owns a broadly diversified portfolio of businesses. That said, it has been plagued by anemic topline growth over the past decade, even as its debt pile has ballooned, and management has been forced to make massive write-offs that reflect poor capital allocation decisions.

Moving forward, the company is expected to cut its once rock-solid dividend as it spins off some of its businesses in order to try to deleverage and improve focus on its core assets.

While Wall Street analysts have mixed opinions about the stock, the consensus price target implies decent upside from current levels and the company’s current valuation multiples are roughly in line with its historical averages.

As a result, investors could possibly justify adding shares at current prices, but also may want to wait for an even greater margin of safety given how poorly management has performed in recent years.

Disclosure: At the time of publication, Samuel Smith did not have a position in any of the securities mentioned in this article.

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