Despite the challenging macroeconomic environment, telecom giant AT&T Inc.’s (T) shares have gained 29.3% in price over the past three months and 27.9% over the past year to close the last trading session at $19.55. The stock has recently traded at an average volume of 42.61 million.
Despite the challenging macroeconomic environment, T’s earnings and revenue beat analyst estimates in the third quarter. Its EPS beat analyst estimates by 10.4%, while its revenue came 0.6% above the consensus estimate. Although the company’s revenue declined on a year-over-year basis, the decline can be attributed to the divestments of WarnerMedia and DirecTV.
T received $43 billion from the divestments of WarnerMedia and DirecTV, allowing the company to focus entirely on its wireless and broadband operations and also helping it trim its debt.
The company recorded 708,000 postpaid phone net additions in the third quarter, higher than estimates. In addition, its 338,000 fiber broadband subscribers beat the forecast of 330,000. Its postpaid phone churn came in at 0.84% for the third quarter.
The postpaid phone net additions during the third quarter led to 2.20 million plus postpaid phone net adds, which is expected to be the industry’s best. T’s CEO John Stankey said, “Our results show our strategy is resonating with customers as we continue to see robust levels of postpaid phone net adds and approach 1 million AT&T Fiber net adds for the year.”
“Our disciplined go-to-market approach is helping drive healthy subscriber growth with high-quality customers. As a result, we now expect to achieve wireless service revenue growth in the upper end of the 4.5% to 5% range. We remain confident in our ability to achieve, or surpass, all our financial commitments for the year while still investing to bring our customers the industry’s best services,” he added.
T's Chief Financial Officer Pascal Desroches said that the company would continue investing in 5G and fiber between 2022 and 2023. Also, the company expects to achieve its 2.5x net debt-to-adjusted EBITDA target and use the remaining cash left after paying dividends to trim debt.
Desroches believes that free cash flow growth in 2023 will be driven by wireless revenue growth from rising ARPUs from postpaid; growth in fiber subscribers, ARPUs, and revenues; and its ongoing cost transformation initiatives will aid profitability. The company continues to aim for 30 million-plus fiber locations by the end of 2025.
Moreover, T’s forward annual dividend of $1.11 per share yields an attractive 5.68% at the current price. Its four-year average yield is 8.79%. The company will pay a dividend of $0.2775 per share on February 1, 2023. Wall Street analysts expect the stock to hit $20.36 in the near term, indicating a potential upside of 4.3%.
Here’s what could influence T’s performance in the upcoming months:
Strategic Agreement
On December 23, 2022, T and BlackRock Alternatives, through a fund managed by its Diversified Infrastructure business, announced a definitive agreement to form a joint venture to operate a commercial fiber platform. The joint venture called Gigapower, LLC will provide a fiber network to internet service providers and other businesses across the U.S.
Gigapower will serve customers outside T’s 21-state wireline service. T’s CEO John Stankey said, “With this joint venture, more customers and communities outside of our traditional service areas will receive the social and economic benefits of the world’s most durable and capable technology to access all the internet has to offer.”
Mixed Financials
T’s total operating revenues declined 4.1% year-over-year to $30.04 billion for the third quarter ended September 30, 2022. The company’s total operating expenses decreased 4.2% year-over-year to $24.03 billion.
Its adjusted operating margin came in at 35.7%, compared to 34.5% in the year-ago period. Also, its adjusted EPS increased 3% year-over-year to $0.68. In addition, its adjusted EBITDA increased 4.7% year-over-year to $10.71 billion.
Weak Analyst Estimates
Analysts expect T’s EPS for fiscal 2022 and 2023 to decline 23.4% and 1.2% year-over-year to $2.60 and $2.57, respectively. Its revenue for fiscal 2022 and 2023 is expected to decline 26.1% and 1.6% year-over-year to $124.72 billion and $122.70 billion, respectively.
Discounted Valuation
In terms of forward non-GAAP P/E, T's 7.51x is 56% lower than the 17.08x industry average. Its forward P/S of 1.12x is 15.1% lower than the 1.31x industry average. Also, the stock's 7.56x trailing-12-month EV/EBITDA is 12.2% lower than the 8.61x industry average.
High Profitability
In terms of trailing-12-month EBIT margin, T’s 21.31% is 130.4% higher than the 9.25% industry average. Likewise, its 34.13% trailing-12-month EBITDA margin is 80.1% higher than the industry average of 18.95%.
Furthermore, the stock’s 12.90% trailing-12-month net income margin is 186.2% higher than the industry average of 4.51%.
POWR Ratings Show Promise
T has an overall rating of B, which equates to a Buy in our POWR Ratings system. The POWR Ratings are calculated by taking into account 118 different factors, with each factor weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight distinct categories. T has a B grade for Value, in sync with its discounted valuation.
It has a B grade for Quality, consistent with its high profitability.
T is ranked #4 out of 19 stocks in the Telecom – Domestic industry. Click here to access T’s Growth, Momentum, Stability, and Sentiment ratings.
Bottom Line
T is trading above its 50-day and 200-day moving averages of $18.84 and $18.51, respectively, indicating an uptrend. It registered strong growth in postpaid wireless phone customers and fiber broadband subscribers in the third quarter.
The company trimmed its debt through its divestment of WarnerMedia and DirecTV. T aims to achieve 2.5x net debt-to-adjusted EBITDA, and free cash flow growth is expected to be driven by wireless revenue growth in 2023. Moreover, the company is aiming for 30 million-plus fiber locations by the end of 2025.
Its joint venture Gigapower will help it expand its fiber coverage by an initial 1.5 million locations and also provides the opportunity to expand its out-of-network footprint further. Given its discounted valuation, high profitability, and high dividend yield, it could be wise to buy the stock now.
How Does AT&T Inc. (T) Stack up Against Its Peers?
T has an overall POWR Rating of B, equating to a Buy rating. Check out these other stocks within the Telecom – Domestic industry with an A (Strong Buy) or B (Buy) rating: Spok Holdings, Inc. (SPOK), Ooma, Inc. (OOMA), and Verizon Communications Inc. (VZ).
T shares were trading at $19.55 per share on Monday morning, up $0.14 (+0.72%). Year-to-date, T has gained 7.73%, versus a 4.20% rise in the benchmark S&P 500 index during the same period.
About the Author: Dipanjan Banchur
Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets.
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