AT&T’s Getting Back to Basics

In times of uncertainty, investors search for safety. 

AT&T (T) is one of their safe havens. Its history goes back to the 1800s. 

Over the last several months, we’ve seen a compression in financial pros’ number of searches for T and its rival Verizon (VZ).

Typically, the spread between the two, in terms of search volume, is several hundred wide.

Now it’s down to less than 200.

This could be because AT&T slashed its dividend to invest in the 5G rollout.

No matter the reason, we thought it was time for us to dive into the company.

AT&T’s Business

AT&T offers business and consumer telecommunications services. It boasts the nation’s most reliable 5G network, reaching more than 281 million people and nearly 22,000 cities and towns in the U.S. 

The company’s AT&T Fiber reaches approximately 18 million customer locations in 100+ metro areas in the U.S. 

The firm added over 708K postpaid phone subscribers and 338K AT&T Fiber subscribers in Q3 2022, helping push its wireless services revenues up 5.6%, its best growth in over a decade. 

Moreover, AT&T Fiber’s growth of more than 30% drove its broadband revenues up 6.1%. 

AT&T is the first U.S. carrier to reach 100+ million IoT connections, more than double its closest competitors. 

However, for the last several years, the company has been losing subscribers in its U.S. video category. And its wireline (landline) business has been in decline for more than a decade.

Its purchase of Time Warner in 2018 added significant debt to the firm. And its DirecTV, U-verse, and AT&T TV brands were consistently losing subscribers to cord-cutting services like Netflix. 

Consequently, AT&T spun off its struggling video business to focus on its core strengths, broadband and wireless communications.

The spinoff of Warner Brothers (a former Time Warner brand) finished in April of this year, and DirectTV spun off (with U-verse and AT&T TV) in August 2021.  

AT&T Financials

T has struggled to get back to its 2019 high of $181 billion in revenues. In 2021, it did $168 billion in revenues, and its 12-month trailing revenues are $155.3 billion. 

The company’s satellite TV business has declined for years as more people switch to streaming. As we mentioned, it’s spun off some of its video services, including DirecTV. But it’s still sitting on a mountain of debt from its acquisition of Time Warner in 2018.

The firm has $2.4 billion in total cash and $152 billion in total debt. Its current ratio of 0.62 could be better. But the firm pays out an attractive annual dividend of $1.11 per share, a yield of 6%. 

Valuation

By P/E GAAP ratio, T is the cheapest telecom stock on the market. 

It stands at 7.6x, compared to VZ at 8.1x, T-Mobile (TMUS) at 123.7x, América Móvil (AMX) at 14.6x, and Vodafone (VOD) at 14.6x.

T trades at an attractive 0.8x price-to-sales ratio, notably lower than VZ at 1.1x, TMUS at 2.3x, and AMX at 1.3x. Only VOD is lower at 0.67x, but it’s 4x smaller than T by market cap. 

Profitability

T has a gross profit margin of 54.3%, which is in line with its largest competitors. VZ and TMUS are slightly higher at 56.9% and 55.1%, respectively. 

However, T has an EBITDA margin of 34%, higher than VZ, TMUS, AMX, and VOD. And none of its competitors can match its EBIT margin of 21.2%. VZ comes closest at 19.7%.

It’s worth noting that Apple’s iPhone is the biggest player in the mobile phone category and is available through carriers T-Mobile, AT&T, and Verizon.

T’s net operating cash flow of $32.9 billion is lower than only VZ at $36.5 billion. T has a significantly higher cash flow than TMUS, AMX, and VOD.  

Growth

T had negative revenue growth year over year as it divested from the business units we listed. But besides AMX growing revenues at 23.8%, its competitors have grown revenues only by low single digits over the last year. 

AT&T’s EBITDA growth of 6.7% tops its two largest competitors. Verizon’s EBITDA growth is -10%, and T-Mobile’s is -4.7%. But smaller firms AMX and VOD had EBITDA growth of 11.8% and 14.4%, respectively. 

Our Opinion 9/10

AT&T made some bad deals acquiring Time Warner and DirecTV, and its shareholders paid the price. 

However, the company is now focusing on its core strengths, wireless and broadband. It pays a handsome dividend and is relatively cheap compared to its competitors. We believe the company will turn things around and think it’s a good investment at these levels.

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