AT&T: Stock With 20% Growth Potential

by Trefis Team
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We believe AT&T stock (NYSE: T) may be a good opportunity at the present time. AT&T trades at $28 currently and is, in fact, down 29% so far this year (from $39 at the beginning of 2020). It traded at $38 in February 2020 – just before the coronavirus pandemic hit the world – and is currently 28% below that level as well. This is after AT&T stock gained 4% from its March lows of less than $27. The stock has underperformed the market over recent months because of a lackluster debut of HBO Max and also the intense competition the company faces from Verizon and T-Mobile in the 5G technology expansion. But the gradual opening up of the economy is expected to lead to recovery in consumer spending in the coming quarters while HBO Max is also expected to gradually increase its subscriber base, albeit at a slower pace. This could drive the stock 20% higher from its current level. Our conclusion is based on our comparative analysis of AT&T stock performance during the current financial crisis with that during the 2008 recession in our interactive dashboard.

2020 Coronavirus Crisis

Timeline of 2020 Crisis So Far:

  • 12/12/2019: Coronavirus cases first reported in China
  • 1/31/2020: WHO declares a global health emergency.
  • 2/19/2020: Signs of effective containment in China and hopes of monetary easing by major central banks helps S&P 500 reach a record high
  • 3/23/2020: S&P 500 drops 34% from the peak level seen on Feb 19, as COVID-19 cases accelerate outside China. Doesn’t help that oil prices crash in mid-March amid Saudi-led price war
  • Since 3/24/2020: S&P 500 recovers 57% from the lows seen on Mar 23, as the Fed’s multi-billion dollar stimulus package suppresses near-term survival anxiety and infuses liquidity into the system.

In contrast, here is how AT&T stock and the broader market fared during the 2007-08 crisis

Timeline of 2007-08 Crisis

  • 10/1/2007: Approximate pre-crisis peak in S&P 500 index
  • 9/1/2008 – 10/1/2008: Accelerated market decline corresponding to Lehman bankruptcy filing (9/15/08)
  • 3/1/2009: Approximate bottoming out of S&P 500 index
  • 12/31/2009: Initial recovery to levels before accelerated decline (around 9/1/2008)

AT&T and S&P 500 Performance Over 2007-08 Financial Crisis

AT&T stock declined from levels of about $42 in September 2007 (pre-crisis peak) to levels of $24 in March 2009 (as the markets bottomed out), implying AT&T stock lost 44% from its approximate pre-crisis peak. It recovered post the 2008 crisis, to levels of close to $28 in early 2010, rising by 18% between March 2009 and January 2010. In comparison, the S&P 500 Index saw a decline of 51% and recovered 48%.

AT&T Fundamentals Over Recent Years Have Been Strong

AT&T revenues increased from $146.8 billion in 2015 to $181.2 billion in 2019, due to increase in post-paid connections. Despite higher revenues, margins declined slightly over recent years with EPS decreasing from $2.37 in 2015 to $1.90 in 2019. However, the company’s Q3 revenues saw a 5% y-o-y decline due to a drop in voice as well as broadband connections during the current crisis. Earnings came in at $0.76/share as against $0.94/share in the year-ago period, mainly due to lower revenue, along with higher equipment cost and depreciation.

Does AT&T Have Sufficient Cash Cushion To Meet Its Obligations Through The Coronavirus Crisis?

AT&T’s total debt increased from $123.5 billion in 2016 to $159 billion at the end of Q3 2020, while its total cash went up from $5.8 billion to $9.8 billion over the same period. AT&T generated healthy cash from operation of over $33 billion in the first nine months of 2020. The company has enough liquidity cushion to weather the current crisis.

Conclusion

Phases of Covid-19 Crisis:

  • Early- to mid-March 2020: Fear of the coronavirus outbreak spreading rapidly translates into reality, with the number of cases accelerating globally
  • Late-March 2020 onward: Social distancing measures + lockdowns
  • April 2020: Fed stimulus suppresses near-term survival anxiety
  • May-June 2020: Recovery of demand, with gradual lifting of lockdowns – no panic anymore despite a steady increase in the number of cases
  • July-October 2020: Subdued Q3 performance and lukewarm Q4 expectations, but continued improvement in demand, a decline in the number of new cases, and progress with vaccine development buoy market sentiment

The actual recovery and its timing hinge on the broader containment of the coronavirus spread. Our dashboard Trends In U.S. Covid-19 Cases provides an overview of how the pandemic has been spreading in the U.S. and contrasts with trends in Brazil and Russia. Though the recently launched streaming service, HBO Max, failed to generate the kind of buzz that Disney+ managed a couple of months back, we expect HBO Max to pick up in the coming months with HBO having a rich content library that caters to consumers of all age groups. As lockdowns are lifted gradually, we believe theatrical releases could resume by Q4 2020 onward, which could drive growth in content and advertising revenue. AT&T is also a party to the 5G revolution, which is considered to be the next big thing for the telecom industry. A combination of these factors is expected to be reflected in revenue and earnings growth in 2021, and with the investors now focused on 2021 numbers. As per AT&T’s valuation, Trefis has a price estimate of $34 per share for AT&T’s stock.

What if you’re looking for a more balanced portfolio instead? Here’s a high quality portfolio to beat the market, with over 100% return since 2016, versus 55% for the S&P 500. Comprised of companies with strong revenue growth, healthy profits, lots of cash, and low risk, it has outperformed the broader market year after year, consistently.

 

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