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David Krejca
David Krejca
Articles (6)  | Author's Website |

AT&T: Undervalued Telecom With a Lot of Growth Initiatives Ahead

A closer look at the company's valuation and plans for the future

June 24, 2019 | About:

Investment thesis

AT&T Inc. (NYSE:T) is a high dividend-paying telecommunications company, whose shares have recently significantly retreated from local highs. With a widespread rollout of 5G networks, an undrawn total addressable market opportunity, solid financial footing and attractive valuation, it is unlikely the stock will remain at its current level for an extended period of time.

Corporate profile

Formerly known as SBC Communications Inc., AT&T operates telecommunication, media and technology service networks all around the world. According to its annual filing with the Securities and Exchange Commission, the company has four reportable segments: Communication, WarnerMedia, Latin America and Xandr, which is a fast-growing advertising business.

Around 90% of the company’s revenues come from the United States with the rest from Europe (2.4%), Mexico (1.8%), Brazil (1.6%), Asia Pacific (1.3%) and Latin America (1.8%). As of Jan. 31, the company had a total of 268,000 employees, of which around 40% were represented by unions.

Key insights from the latest quarterly earnings call

Reading through the latest quarterly earnings transcript, management discussed several topics on what is currently happening within the company and the industry and partially revealed the inner workings of its business.

During the earnings call CEO John Donovan said:

''So a business that does direct response, run a commercial, call an 800 number is not going to get the same opportunity as the three store visits a year and 90 minutes of, let's say, non-pressured familiarity with, hey, what's going on with AT&T.’’ 

Donovan also highlighted priorities for the next several quarters, which is to pay down some debt by the end of the year and tap into its network of first responders and 5G, which was already launched in 19 markets.

''I mean, we have a database of customers that have called trying to get our product for whom we weren't able to serve and we can now call them back up and say, hey, look, we've got a great opportunity for you," he said.

Lastly, the CEO emphasized good performance of its fiber business and growing momentum in the wireless segment.

Firm financials

Looking at AT&T’s financial statements, the company can showcase strong profitability metrics – (15%-plus Ebit margin and 10%-plus return on equity) - levered with a sustainable level of debt - (debt-to-Ebitda ratio of 2.8). On the negative side, however, the company currently struggles with is liquidity, which stands below the industry average (current ratio of 0.8 versus the industry’s 1.0).

Valuation

Plugging AT&T's financials into my discounted cash flow template, the company’s shares appear to be considerably undervalued. Under the perpetuity growth method with a terminal growth rate of 2%, constant 6% annual revenue growth over the next five years and 15% earnings before interest and taxes margin, the fair value of the stock comes in at $138.

Under the earnings before interest, taxes, depreciation and amortization multiple approach of a DCF model, the intrinsic value per share of the company stands roughly at $92 if we assume the appropriate exit enterprise value-Ebitda multiple in five years' time is around 10.

Wide margin of safety and generous annualized return potential

From a different perspective, working with operating earnings multiples, AT&T's shares also appear significantly undervalued. Using the F.A.S.T. Graphs forecasting calculator with a 5% adjusted operating earnings growth rate assumption, the company's intrinsic value by the end of December 2024 is forecasted to reach up to $70 (excluding the value of regular dividend). This implies a total annualized rate of return upside potential of as much as 18%.

The bottom line

To sum up, AT&T is a stable, high dividend yield company with an undrawn total addressable market opportunity. With the arrival of 5G networks, the company has a lot of space to expand its current offerings and build new products around its existing network.

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About the author:

David Krejca
Finance graduate with professional experience from banking and investment management industry. Successfully passed Level I of the CFA Program (June 2016). All articles are my opinions and do not constitute investment recommendations or advice.

Visit David Krejca's Website


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