Through a big portion of 2020, one of the areas that I was able to find some interesting valuations to work with was in the Telecommunications industry. Some of the largest players in the industry do much more than just telecommunications; AT&T Inc. (T) has, of course long been one of the largest telecommunications companies in the United States, which has also given them the ability to branch out and diversify their business into the entertainment world. 2020 has proven to be a challenging year for many of this “diversified telecomm services” company’s businesses; that has helped to keep the stock price relatively low for the last year, but the latest earnings report shows some serious signs of deterioration that a material recovery could take longer than expected.
In 2015, the company acquired DirecTV, a segment that has struggled for the last couple of years, following a longer-term theme as consumers are increasingly “cutting the cord” on traditional cable or satellite TV services. T has been looking to sell DirecTV, along with other underperforming segments to private equity investors, but would be unlikely to recoup the $49 billion it paid (latest estimates put final expected bids from unnamed, interested parties in the $15 billion range). In 2018, T’s acquisition of Time Warner gave it a foothold in the same space occupied by media companies like Viacom and Disney. The onset of the global pandemic meant shutting down the entire WarnerMedia unit and heavy capital spending to protect employees, plus the launch of its own streaming service, HBO Max to compete with Netlflix, Disney+, and Amazon Prime; its results have mostly been mixed even as WarnerMedia made waves at the end of 2020 by announcing its plan to release new movie titles on HBO Max at the same time it makes them available in theaters.
Even with those headwinds, however, there are also some interesting strengths to consider, including a balance sheet that has remained relatively strong throughout the year even in the midst of an almost complete shutdown of the WarnerMedia unit during the initial outbreak. Late in 2020, rumors emerged that T was considering a sale of its Warner Bros. Interactive Entertainment gaming division, a transaction that could bring in $4 billion to help the company pay off new debt the company took on in the wake of COVID-19 to cover the WarnerMedia shutdown and protect its employees.
T is an interesting mix of opportunity and risk right now; assuming the pandemic eventually does begin to subside this year, and consumer activity begins to resume some semblance of “normal,” T should be well-positioned, with a healthy stable of new movie and television releases that can drive interest from the WarnerMedia segment, a strong focus on its telecommunications roots through its heavy investments in 5G infrastructure and connectivity, still healthy Free Cash Flow and a dividend that is well above the S&P 500 average. Are those strengths enough to offset concerns from deteriorating Net Income, narrowing liquidity and increasingly heavy debt, and just as importantly, what does the stock’s current price say about the long-term opportunity for investors?
Fundamental and Value Profile
AT&T Inc. is a holding company. The Company is a provider of telecommunications, media and technology services globally. The Company operates through four segments: Communication segment, WarnerMedia segment, Latin America segment and Xandr segment. The Communications segment provides wireless and wireline telecom, video and broadband services to consumers.The business units of the Communication segment includes Mobility, Entertainment Group and Business Wireline. The WarnerMedia segment develops, produces and distributes feature films, television, gaming and other content over various physical and digital formats. The business units of the WarnerMedia segment includes Turner, Home Box Office and Warner Bros. Latin America segment provides entertainment services in Latin America and wireless services in Mexico. Viro and Mexico are the business units of the Latin America segment. The Xandr segment provides advertising services. T has a current market cap of about $203.2 billion.
Earnings and Sales Growth: Over the last twelve months, earnings shrank by about -15.73%, while revenue declined about -2.41%. In the last quarter, earnings were -1.32% lower, while revenues grew 7.91%. T operates with an operating profile that had been narrowing through most of 2020, but plunged decisively into negative territory in the last quarter. Over the last twelve months, Net Income was -3.01% of Revenues, and weakened to a little over -30% in the last quarter.
Free Cash Flow: T’s free cash flow is healthy, at more than $27.45 billion. This number has increased steadily since early 2015, from about $10 billion, but has dropped from the beginning of 2020, when it was about $29.2 billion. The current number translates to a useful Free Cash Flow Yield of 13.50%.
Dividend: T’s annual divided is $2.08 per share, which translates to a compelling yield of 7.29% at the stock’s current price.
Debt/Equity: T carries a Debt/Equity ratio of .86, which is generally considered a pretty conservative number that doesn’t really paint a complete picture. Their balance sheet shows nearly $9.7 billion in cash and liquid assets versus $153.7 billion in long-term debt. Much of that debt is associated with the Time Warner acquisition, and which is expected to be paid down in the long run; but being forced to shut down the WarnerMedia segment due to COVID-19-imposed restrictions earlier this year also forced the company to realize additional short-term costs of nearly $500 million that haven’t been offset by revenues.
Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but I like to work with a combination of Price/Book and Price/Cash Flow analysis. Together, these measurements provide a long-term, fair value target a little below $32 per share. That suggests that, the stock is only modestly undervalued right now, with about 11% upside from its current price. It is also worth noting that at the end of the second quarter of last year, my Fair Value target for T was closer to $40.
Technical Profile
Here’s a look at the stock’s latest technical chart.
Current Price Action/Trends and Pivots: The red diagonal line measures the length of the stock’s downward plunge to bear market territory in March 2020 around $26; it also informs the Fibonacci trend retracement lines shown on the right side of the chart. From that low, the stock rallied to about $33 early in June before dropping back to a consolidation range between $29 and $30 per share. The stock dropped below that range in September, finding a bottom in late October near the March, 52-week low point before rebounding strongly into the early part of December to a short-term peak at about $31. The stock appears to be settling into a new consolidation range now, with immediate support at around $28 and resistance at about $30. A drop below $28 should find next support in the $26 price area, while a push above resistance at $30 has next resistance only about $1 away based on both that December peak and the 38.2% retracement line.
Near-term Keys: T offers a high dividend that makes for tempting bait for income-seeking investors; however the steep deterioration in Net Income is a big concern, as is the company’s limited liquidity relative to its debt service. The stock’s bargain price is at around $26 given its current fundamental data, and given some of the other elements at play right now that are working against the stock, thinking about T as a good long-term bet seems risky right now. The limited near-term, technical room on either the bearish and bullish side right now don’t make the stock particularly attractive for short-term trading strategies, which is why I think the smart thing to do for is to put T aside and come back again after the next earnings report in March to reassess.