AT&T Stock Will Continue To Underperform

by Trefis Team
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We believe AT&T stock (NYSE:T) would find it difficult to go back anywhere close to its pre-Covid level of $38 per share anytime soon. AT&T trades at $28 currently and is, in fact, down 28% 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 27% below that level as well. AT&T stock has managed to gain only 5% from its March 2020 low of less than $27. The stock has underperformed the market over recent months because of a lackluster launch of HBO Max, along with the recent acquisition of Warner Media not adding much to the top line in 2020 due to the pandemic severely hitting the movie and advertising revenues for media giants. Also, it continues to face 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 close to 10% higher from its current level, but it will not reach anywhere close to its pre-Covid level in the near term. Our conclusion is based on our comparative analysis on AT&T stock performance during the current financial crisis with that during the 2008 recession in our 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 75% 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 $171.8 billion in 2020, due to increase in post-paid connections. Despite higher revenues, margins declined over recent years with EPS decreasing from $2.10 in 2016 to -$0.75 in 2020. Margins in 2020 were hit due to lower revenue, higher equipment costs and high asset impairment.

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 $157.2 billion in 2020, while its total cash went up from $5.8 billion to $9.7 billion over the same period. AT&T generated healthy cash from operation of $43 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 buoy 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. But attaining the pre-crisis level looks unlikely as of now.

While AT&T stock may not have moved a lot, 2020 has created many pricing discontinuities which can offer attractive trading opportunities. For example, you’ll be surprised how how the stock valuation for Verizon vs Air Worldwide Holdings shows a disconnect with their relative operational growth. You can find many such discontinuous pairs here.

 

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