Hold On To AT&T Stock For More Gains

Despite almost a 15% rise since its March lows of this year, at the current price of $31 per share, AT&T stock (NYSE: T) still seems to have some upside left and looks like a good stock to have in your portfolio. AT&T stock has rallied from $27 to $31 off the recent bottom compared to the S&P 500 which has increased over 60% from its recent lows. The stock has underperformed the broader market because of a low-decibel launch of HBO Max, along with the recent acquisition of Warner Media not likely to add much to the top line in 2020 due to the ongoing pandemic hitting the movie and advertising revenues for media giants. The company’s stock is still more than 20% below its December 2017 level (almost 3 years back). Despite the recent stock price rise and revenues projected to be lower (y-o-y) in 2020, we feel that the company’s stock still has potential to rise almost 10% from here as HBO Max is likely to pick up in the coming months and a gradual easing of lock down is expected to help drive revenues in other segments in the coming quarters. Our dashboard Buy Or Sell AT&T Stock has the underlying numbers.

Some of the stock price decline since 2017 is justified by the almost 60% decline in AT&T’s profits, as net income margin declined from 18.3% in 2017 to 7.7% in 2019. The sharp drop in 2018 was because margins were unusually high in 2017 due to one-time tax benefits received, but they further went down in 2019 due to large actuarial losses realized during 2019. This was partially offset by 13% revenue growth between 2017 and 2019. On a per share basis, earnings declined 60% from $4.77 in 2017 to $1.90 in 2019.

Despite EPS going down, the company’s P/E multiple has seen a continuous rise from 8x in 2017 to 21x in 2019. This was mainly because the stock price increased as the EPS drop was driven by non-recurring factors, while operating margins have steadily increased during this period. Having dropped in early 2020 after the outbreak of coronavirus, the P/E multiple has recovered over recent months and currently stands at 16x. We believe the multiple has a marginal upside to reach close to 18x in the near term.

Where is the stock headed?

The global spread of coronavirus led to lockdown in various cities across the globe, which affected industrial and economic activity along with consumer spending. Additionally, the lock down in almost all major global cities has affected AT&T revenues from Warner media because of less content developed and lower advertising revenue, while the telecom business saw slowdown in post-paid subscriber additions. The results announced over recent quarters reflected the impact of the crisis as total revenues saw a y-o-y decline of 9% and 5% in Q2 and Q3 2020, respectively. This was because of a sharp decline in Warner Media due to an absence of theatrical releases and lower games and other revenues.

Though the launch of streaming service HBO Max this year failed to generate the kind of buzz that Disney+ managed a year back, we expect HBO Max to pick up in the coming months as streaming demand increases and with it having a rich content library that caters to consumers of all age groups. HBO Max total global subscriber base is currently around 57 million. As lockdowns are lifted gradually, we believe theatrical releases will also resume soon, which could drive growth in content and advertising revenue from Q1 2021.

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. In addition to increased streaming demand and expectations of traditional businesses to get back on track in the next 1-2 quarters, 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, AT&T’s P/E multiple is likely to rise from the current 16x to close to 18x. This provides AT&T’s stock with a potential upside of close to 10% from its current level.

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