Why AT&T Stock Looks Overvalued At $31?

by Trefis Team
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We believe at the current price of $31 per share, AT&T stock (NYSE: T) seems to have surpassed its fair value. AT&T stock trades at $31 currently and is, in fact, down 20% 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 18% below that level, as well. AT&T stock has managed to gain only 10% from its March 2020 low of $28. The stock has underperformed the market over recent months because of a low decibel launch of its streaming offering 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, AT&T continues to face intense competition from Verizon and T-Mobile in the 5G technology expansion, alongside Dish Network who announced a partnership with Amazon’s AWS for 5G. While HBO Max is also expected to gradually increase its subscriber base, albeit at a slower pace, the recent spike in Covid positive cases is leading to expectations of a delay in recovery of advertising revenues and the movie business. Thus, we believe that despite the stock price being below its pre-Covid levels, it is still overvalued at $31 and is likely to see a marginal drop to $30 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 86% 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 little over $28 in early 2010, rising by 19% 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 $160.5 billion in 2017 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 $4.77 in 2017 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 decreased from $164.3 billion in 2017 to $157.2 billion in 2020, while its total cash went down from $50.5 billion to $9.7 billion over the same period. AT&T generated healthy cash from operation of $43 billion in the last twelve months. Though the debt level is quite high, a healthy cash from operations generation capacity over recent years provides the company a 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 the recent rise in AT&T stock has already accounted for the growth in subscriber base, revenue, and earnings in the coming quarters. The company faces intense competition in the streaming and 5G businesses and we will, in fact, likely see a marginal drop in AT&T’s stock in the near term to reach $30.

5G wireless technology is a hot trend. Which stocks should you pick? Check out our theme on 5G Stocks for details.

 

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