AT&T Stock Will Not Go Back To Its Pre-Covid High

by Trefis Team
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We believe AT&T stock (NYSE: T) may be a decent opportunity at the present time. AT&T trades at $29 currently and is, in fact, down 25% from the level of $39 seen in the beginning of 2020. It traded at $38 in February 2020 – just before the coronavirus pandemic hit the world – and is currently 24% below that level as well. This is after AT&T stock gained 9% from its March 2020 low of less than $27. The stock has underperformed the market over recent months 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. Also, it faces intense competition 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 10% higher from its current level, but a full recovery to the pre-Covid level looks unlikely any time soon. 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, 2020, 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 69% from the lows seen on Mar 23, 2020, 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

AT&T revenues increased from $163.3 billion in 2016 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 $2.10 in 2016 to $1.90 in 2019. However, the company’s Q3 revenues saw a 5% y-o-y decline due to a drop in the voice as well as broadband connections during the current crisis. Last twelve months revenue stands at $172.9 billion, lower than the FY2019 revenue level. Earnings came in at $0.76/share in Q3 2020 as against $0.94/share in the year-ago period, mainly due to lower revenue, along with higher equipment cost and depreciation. Last twelve months’ earnings stand at $1.52 per share.

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 $158.9 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 $45 billion in the last twelve months. 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
  • Since late 2020: Weak quarterly results, but continued improvement in demand and progress with vaccine development buoy market sentiment

Despite the recent surge in the number of new Covid-19 cases in the U.S., we expect continued improvement in demand to prop up  market expectations. As investors focus their attention on expected 2021 results, we believe AT&T stock has the potential for modest gains once fears surrounding the Covid outbreak are put to rest.

While AT&T stock may have moved just 9% from its March 2020 low, 2020 has created many pricing discontinuities which can offer attractive trading opportunities. For example, you’ll be surprised how counter-intuitive the stock valuation is for General Motors vs Comcast.

 

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