Why AT&T’s Stock Has Outperformed This Year

+3.91%
Upside
17.61
Market
18.29
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AT&T

AT&T (NYSE:T), the second largest U.S. wireless carrier and largest pay TV company, has seen its stock price rise by close to 23% year-to-date, significantly outperforming the S&P 500, which is up by just about 4% in the same period. Below we take a look at some of the possible reasons for the rally.

We have a $46 price estimate for AT&T, which is slightly ahead of the current market price.

See our complete analysis for AT&T here

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DirecTV Acquisition Beginning To Bear Fruit 

AT&T’s mid-2015 acquisition of  DirectTV is beginning to bear some fruit, and it is becoming increasingly clear that the deal was a smart move. The firm expects run-rate cost savings of $1.5 billion by the end of this year, on account of lower content costs as well as other operational synergies. The firm has also been promoting the more profitable satellite business over its proprietary U-Verse video offering. DirecTV’s content assets and the potential for cross selling services could also result in meaningful revenue synergies in the long-run.

Increasing Wireless Margins 

AT&T has been increasingly focusing on the profitability of its wireless operations as the U.S. wireless market saturates. The carrier’s wireless operating margins expanded by about 350 basis points y-o-y during Q1. The carrier has been letting go of less profitable feature phone subscribers (average ARPU of ~$35), amid a focus on higher-value smartphone users. Additionally, AT&T is also benefiting from lower equipment subsidy costs. AT&T is targeting a cost structure that is the best in the industry, leveraging automation in service delivery, IT rationalization, as well as software savings. (related: Can AT&T’s Wireless Margins Continue To Expand?)

Strong Customer Loyalty And Pricing Power

AT&T’s customer loyalty also remain very high, with postpaid churn figures coming in at levels of roughly 1.1%, second only to Verizon. The carrier has also largely refrained from engaging in the price wars started by its smaller rivals Sprint and T-Mobile, indicating that its value proposition lies in its stronger network coverage and performance.

Preference For Defensive Stocks Amid Economic Uncertainty, Currency Headwinds

There have been concerns regarding the global economy, amid economic headwinds in China and the U.K.’s decision to leave the E.U. This has also resulted in significant currency headwinds, which have put pressure on many U.S. large-cap names. This has resulted in a “flight to safety” to stocks such AT&T, which offer healthy dividend yields, stable earnings and cash flows as well as limited overseas exposure. AT&T’s key rival Verizon has also seen a similar uptick in its stock price this year.

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