AT&T Inc. (T, Financial) rewarded shareholders with healthy returns in 2016, but the stock has taken a hard hit this year. The stock is down nearly 10% year to date, representing a good buying opportunity for investors.
AT&T reported first-quarter results in April. For the quarter, the company posted earnings per share of 74 cents, in line with analysts' estimates. On the other hand, revenue came in at $39.40 billion, missing the consensus by $1.17 billion. Most significantly, that figure signifies a drop of 2.8% compared to 24.3% growth in the first quarter of 2016
The telecommunication giant’s revenue dip was mainly due to record-low equipment sales in wireless, but throughout the quarter AT&T managed to grow its operating margins from 19.9% to 20.7% by focusing on its cost structure. Moreover, it expects to further expand its margins in the coming quarters.
Moving onward, both AT&T and its rival Verizon Communications Inc. (VZ, Financial) are racing to launch the new generation 5G network. 5G will offer ultra-high-speed as well as ultra-high reliability compared to the existing 4G network.
Both companies took part in a bidding war to acquire Straight Path Communications Inc. (STRP, Financial), which owns bandwidth licenses and intellectual property that will play a vital role in 5G.
Verizon won with a $3.1 billion bid, almost twice AT&T’s initial bid of $1.6 billion. While the loss may have a negative impact on AT&T, its prospects still look healthier than Verizon's.
AT&T is well aware of the rapidly growing cord-cutting trend as viewers continuously adopt streaming services. To benefit from this, the company introduced DirecTV Now, a streaming platform, in November of last year to attract customers.
It appears this was a good decision as it will help AT&T offset the losses in its traditional TV business, which continues to lose subscribers. Moreover, the company is in the process of acquiring Time Warner Inc. (TWX).
Upon completion, the deal should help lead the transition to broadcasting cable services directly to smartphones via wireless networks. Apart from this, it will also help AT&T grow its average revenue per subscriber as well as gain new customers.
The only risk is AT&T’s massive debt load. The company already has a net debt balance of over $100 billion. An acquisition deal with Time Warner would take AT&T’s total debt load to more than $180 billion.
Summing up
AT&T performed very well in 2016, but 2017 has not been a good year for the telecommunication giant so far. The miss on top-line numbers for the most recent quarter resulted in a sharp downturn, but it does not mean the company’s growth is over. It appears free cash flow and earnings will continue growing at a healthy rate over the coming years.
On the other hand, the stock currently offers an impressive dividend yield of 5.13%. The stock trades with a price-earnings (P/E) ratio of 18.74, suggesting it is undervalued.
As a result, investors should consider adding AT&T to their portfolios as it is down over 12% from its 52-week highs.
Disclosure: No position in the stocks mentioned in this article.
Start a free 7-day trial of Premium Membership to GuruFocus.Â
