After announcing the suspension of its $4 billion buyback plan, AT&T Inc (T, Financial) saw its stock price continue to plummet. It also got downgraded by a number of analysts like UBS, Raymond James and Cowen.
However, the company’s core telecom business remains solid and it is on the eve of launching its streaming service HBO Max, which could provide a huge relief in such times when a large part of the world is in a lockdown. Also, its gradual launch of 5G across the United States, coupled with its ability to deliver bundled offerings unlike any of its competitors, provide AT&T a distinct edge.
The company continues to remain solid despite the competitive pressures from Verizon (VZ, Financial) as well as from the merger of T-Mobile (TMUS, Financial) and Sprint (S, Financial). Thus, in my opinion, AT&T stock has a decent upside in 2020 and is worth accumulating at lower levels.
Company overview
AT&T Inc. is a media and telecom behemoth with its core operations in the United States and Latin America and a strong global presence. It is the second-largest wireless carrier in the United States, connecting over a 100 million devices including 63 million post-paid and 16 million pre-paid users. The company’s consumer and entertainment business provides fixed-lines and internet connections and also includes the DirecTV satellite business, serving about 20 million TV sets and 14 million internet users.
After completing the acquisition of Time Warner, the company created a media segment known as WarnerMedia, which includes the Warner Brother Studios, HBO and the Turner cable networks. The company employs close to 246,000 people across the globe and has its headquarters in Dallas, Texas.
HBO Max
The Covid-19 crisis may have taken its toll on financial markets across the globe, but some businesses have definitely benefitted from the pandemic, and streaming services has been one of them. The analyst outlook for Netflix (NFLX, Financial) has actually improved, and the reason for this is the increasing amount of time spent at home by people across the globe. Streaming services are likely to benefit from this, including AT&T’s HBO Max.
The service is to be launched in May 2020, but it already has over 10 million subscribers with immediate access. With quarantines possibly extending to May in the U.S., the willingness to try out new content such as that offered by HBO Max could be a big catalyst for AT&T.
It is worth highlighting that Disney’s (DIS, Financial) Plus service had 10 million subscribers on its very first day, resulting in $2 billion of annualized revenues. HBO Max has strong synergies with AT&T’s cellular and fiber offerings and the package deals that AT&T can offer, further expanding its potential subscriber base.
AT&T fiber
AT&T Fiber could be one of the most promising business segments of the company that could act as a growth catalyst in 2020. Based on AT&T’s financial strength, its cash reserves and also the fact that it is not going to be carrying out the heavy buybacks this quarter, it now has to ability to rapidly build its fiber assets. This is a high-potential revenue stream as the company can earn up to $1,000 each year from every single fiber customer, thus becoming a large contributor to the top-line.
Also, with more people working from home, the demand for AT&T fiber is bound to go up. Another key reason is that consumers are always needing faster internet speeds for their work and for high-quality online video streaming. AT&T can sweeten the deal and receive better payouts by packaging the fiber services with others like the cellular business or even HBO Max for that matter.
Why AT&T is undervalued
Based on the chart above, one can see how AT&T’s stock fell by more than 20% from levels around $39 to almost $27 before showing some recovery. The company suffers from a weakened market perception that is largely driven by the impact of Covid-19 on the general economy. A negative impact on the production of original content for its Entertainment wing, potential delay in 5G implementation in 2020, the loss of live sports, the closing of wireless retail stores, the potential of accelerated linear TV subscriber losses and long-term economic uncertainties are big factors leading to a sell-off, causing the stock price to crash.
AT&T recently suspended its buyback and announced its withdrawal from the agreement with Morgan Stanley to repurchase $4 billion of stock during the second quarter of 2020. AT&T’s over-diversification is a big reason why it is trading at a discount with an enterprise value (EV) to Ebidta ratio of of 7.26, in contrast to simplistic telecom business models like Verizon, which has an EV-Ebitda of 8.03, and T-Mobile with an EV-Ebitda ratio of 7.82.
Key takeaways
Investors can now accumulate AT&T at lower prices, given that the company has reversed from its downslide and now has a five-year yield-on-cost as high as 7.79% after taking into account dividends and buybacks.
The company boasts good fundamentals and promising growth. Overall, I think AT&T is ideally suited for both value investors and long-term yield investors that are looking at promising blue chips in the current crash.
Disclosure: No positions
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