Is Now the Time to Buy AT&T (T)?

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AT&T (T) made a lot of mistakes over the last decade. 

It was forced to jettison its streaming and content arms after failing to extract value.

And they fell behind on the 5G buildout.

Today, the company has made strides to cut its debt load and is looking much healthier than it has in a long while.

In fact, it’s generating enough cash that it could wipe out its $150 billion in debt less than a decade if it wanted to.

We’ve been previously bearish on the company, citing its uncertain outlook.

But, as the TrackStar data showed a recent surge in interest amongst financial pros, we thought it was time to take a new look.

AT&T’s Business

AT&T has been connecting people and businesses for over 140 years, from the first phone call to 5G.

They serve everyone from businesses of all sizes and government agencies, to the average consumer. 

With operations in 40 countries and a team of over 148,000 dedicated employees, AT&T has the scale and expertise to deliver seamless connectivity solutions to customers all around the world.

Now, let’s break down how AT&T organizes its business:

• Communications (96% of total revenues) – This segment is made up of three main business units:
  • Mobility (71% of Communications revenues) – Think smartphones, tablets, and all things wireless.
  • Business Wireline (17% of Communications revenues) – Providing advanced connectivity, legacy voice, and data services to keep businesses connected and running smoothly.
  • Consumer Wireline (12% of Communications revenues) – Offering broadband services, including fiber and fixed wireless access, so people can stay connected at home.
• Latin America (contributing 4% of total revenues) – Wireless services to over 22 million subscribers in Mexico. 

In recent years, AT&T has undergone a significant transformation, streamlining its operations and refocusing on its core connectivity business. 

The company made some bold moves, like spinning off its media assets, including WarnerMedia, which was acquired by Discovery in 2022. 

As part of this transformation, AT&T has been investing heavily in its 5G and fiber networks, spending billions of dollars to expand its 5G coverage

At the same time, the company is rapidly expanding its fiber network, bringing lightning-fast internet to homes and businesses across the country. 

All of this is to offset the dying hardwired phone line business.

So far, it’s working.

Source: AT&T Q1 2024 Earnings Presentation

In their most recent earnings report for the first quarter of 2024, they added 349,000 postpaid phone subscribers and achieved a record-low first-quarter postpaid phone churn rate of 0.72%. 

Plus, their fiber network is expanding rapidly, now passing more than 27 million consumer and business locations, with 252,000 new AT&T Fiber subscribers added in the quarter. 

Financials

Source: Stock Analysis

Revenue declines in 2020 came with lockdowns and lower spending on roaming and advertising.

In 2021, divestitures took a chunk out of revenues as they did in 2022.

Today, the company is leaner, focusing on its core business.

Capex jumped $17- $20 billion to make this transformation. Management said they expect to spend between $21-$22 billion this year.

However, they see free cash flow hitting $17-$18 billion, a little less than half of what they generate from operations.

That money will help them keep bringing down the total debt which skyrocketed to almost $200 billion in 2021 and is now down to $152 billion.

Unfortunately, that has meant no dividend payments from a stock that was a reliable payer.

Valuation

Source: Seeking Alpha

AT&T’s valuation is cheap. The again, so are most telecom companies.

Verizon (VZ), its main competitor, trades at a slightly higher P/E, price-to-cash, and price-to-sales ratio.

Other companies like United States Cellular (USM) and T-Mobile (TMUS) trade at higher multiples. However, we don’t believe those valuations are justified.

Growth

Source: Seeking Alpha

All of the telecoms, except Turkcell Iletisim Hizmetleri (TKC), which operates in Turkey, have achieved tepid growth at best. TMUS has seen decent revenue gains over a 5-year period but nothing recently.

USM and TMUS saw EBITDA gains in the past year. However, those aren’t expected to continue.

Profitability

Source: Seeking Alpha

Gross margins are fairly similar. However, things started to separate in terms of EBITDA margin, especially EBIT.

One of the key points to note is AT&T’s free cash flow margin is higher than everyone else, including Verizon by 2x.

Our Opinion 7/10

AT&T is starting to become interesting. 

Rates should eventually fall, helping the company spend less on debt reduction and put more towards share buybacks or dividends.

We’re looking at early to mid 2025 for when they might restart dividend payments.

In the meantime, AT&T is a better value than its peers.

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