I am neutral on AT&T (T), as it is a company in transition that is not expensive, but also not necessarily cheap at the moment.
AT&T is known as one of the largest telecommunications companies in the United States, with a subscriber base of over 100 million. (See AT&T stock charts on TipRanks)
Recent Results
AT&T reported its Q2 results in July. Total revenue increased by approximately 7.6%, while total adjusted EBITDA decreased by 3.7% compared to the previous year’s quarter.
Its HBO MAX/HBO subscriber metric showed a total of 47 million domestic subscribers. That’s more than 100 million subscribers overall across its postpaid phone, fiber, and HBO businesses.
During a recent update, AT&T’s CEO stated that he believes AT&T Communications and Warner Bros. Discovery will each have the right scale, capital structure, and asset base to lead their respective industries after the spin-off and merger are completed next year.
AT&T continues to expect to close the pending WarnerMedia-Discovery transaction in mid-2022.
AT&T is seeing solid momentum in its strategic areas of focus, underscored by continued strength in 5G, fiber and HBO Max subscribers. AT&T’s network is performing as well as ever, recently winning recognition as the Nation’s Best 5G Network and, for the fourth straight year, America’s Best Wireless Network overall.
This has helped drive improved subscriber growth trends and lower churn, indicating that customers are happy with the combination of service and network quality AT&T delivers. AT&T continues to deploy fiber across its wired footprint, and remains confident in its ability to reach about 2.5 million incremental customer locations by the end of 2021.
HBO Max launched in 39 Latin American territories in June, and is set to launch in six European countries next month, with plans to launch in at least 14 additional European territories in 2022.
The company is also seeing strong initial international subscriber activity, and believes exciting content launches in the second half of 2021, and the first half of 2022, will help drive continued subscriber growth. AT&T continues to expect to reach 70 million to 73 million global HBO Max and HBO subscribers by the end of 2021.
Valuation Metrics
AT&T’s share price looks expensive right now when looking at the forward EV/EBITDA multiple, as the current level of 7.9x is high relative to its historical average of 6.27x.
However, its forward price/normalized earnings of 8.6x is a significant discount to its historical average of 12x.
Last, but not least, AT&T’s forward market cap/free cash multiple of 8.6x is also discounted relative to its historical mean of 11.6x.
Wall Street’s Take
From Wall Street analysts, AT&T earns a Moderate Buy analyst consensus based on five Buy ratings, five Hold ratings, and one Sell rating in the past three months.
The average AT&T price target of $32.33 puts the upside potential at 18.3%.
Summary and Conclusions
AT&T is a company in transition, as it is planning to cut its dividend next year and spin-off its media business so that it can deleverage and better focus on its core businesses and fiber growth opportunities.
A case can be made that the stock is cheap based on its P/E, and price-to-free cash flow, but at the same time it still looks overvalued compared to historical EV/EBITDA levels.
As a result, investors looking at a value play that pays a nice dividend might find it attractive here, but a further pullback would make it more convincing.
Disclosure: At the time of publication, Samuel Smith did not have a position in any of the securities mentioned in this article.
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