AT&T: Purchase Forward Of Q3 Earnings, As Market Estimates Might Be Too Bearish (NYSE:T)

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AT&T: Buy Ahead Of Q3 Earnings, As Market Estimates May Be Too Bearish (NYSE:T)


Forward of the Q3 earnings launch for AT&T Inc. (NYSE:T) scheduled for October twenty second, the inventory is underneath stress and now buying and selling at its lowest stage since late Q1. Shares are down 6% over the previous week and 30% decrease yr to this point amid the COVID-19 disruptions. Whereas the enterprise continues to face challenges with ongoing uncertainty associated to the energy of the financial restoration, there are many causes to stay bullish, as the corporate maintains a optimistic long-term outlook. Indications are that working circumstances proceed to normalize throughout the assorted enterprise segments. Q3 was additionally the primary full quarter because the launch of HBO Max, which possible represented a key progress driver for the corporate. Our sense right here is that expectations are too pessimistic, whereas the monetary profile stays comparatively steady. We’re bullish on shares of T and see upside by 2021.

(Supply: Finviz)

Q3 Earnings Preview

In what has been a difficult yr for AT&T, consensus estimates for Q3 see income declining by 6.8% and EPS 18.4% decrease in comparison with the interval in 2019. The expectation is for continued weak spot within the legacy segments like enterprise wireline, residential voice, broadband, and premium TV merchandise. Individually, the continued limitations of film theatrical releases stress the WarnerMedia studio section. That being mentioned, we predict these estimates are too bearish and see upside notably to the income determine.

(Supply: Looking for Alpha)

AT&T will possible current improved working circumstances in comparison with developments in Q1 and Q2 that have been outlined by native and state lockdown measures forcing its retail retailer closures. For context, revenues in Q2 fell by 6.2% yr over yr, so the consensus estimate for Q3 implies circumstances have been even weaker, which we discover unlikely.

In Q3, AT&T’s retailer community reopened, and there was additionally the return of NBA basketball on the TV community subsidiary “TNT” channel supporting promoting gross sales. We count on the corporate to report continued momentum in its rebranded AT&T TV platform and fiber broadband service as extra robust factors within the quarter.

Extra importantly, all eyes will likely be on metrics associated to the HBO Max standalone streaming service, which launched on the tail finish of Q2 in late Might. In September, AT&T introduced that subscribers between HBO Max and the normal HBO had already surpassed a earlier goal of 36 million forward of schedule. Monitoring factors will likely be metrics like common income per consumer and any kind of perception on engagement. A stable consumer learn with optimistic feedback by administration may help drive optimistic sentiment in the direction of the inventory.

(Supply: Firm IR)

Because it pertains to the core wi-fi “mobility” section, that is an space that continues to face macro headwinds like greater unemployment and general intense competitors from different carriers. Nonetheless, we predict there’s resiliency right here and count on churn to be manageable. It is possible that that the addition of HBO Max permits for some cross-selling that retains customers locked into the ecosystem’s household of providers.

In Q2, AT&T noticed a slight decline of 0.8% y/y in postpaid subscribers, balanced by a 3.3% improve in pay as you go customers. Favorably, the variety of whole related units grew quicker up 22% yr over yr, suggesting shoppers are utilizing cell information plans on a number of units, together with tablets and even smartwatches. Anecdotally, developments like work at home and digital studying could have pushed some incremental system activations within the final quarter. Long term, themes like accelerating adoption of Web of Issues (“IoT”) and an anticipated improve cycle from 5G are positives that AT&T is well-positioned to seize.

The Dividend is Secure

Crucial level favoring a bullish outlook for AT&T is that we imagine the dividend is secure and sustainable for the foreseeable future. The inventory has gained a fame as a perennial favourite amongst earnings buyers with an attractive 7.6% yield. Whereas this objectively excessive yield implies threat and is reflective of the big stability sheet debt place, the information exhibits that recurring profitability and constant money circulation era can simply cowl the quarterly payouts. For context, the annualized dividend of the speed of $2.08 per share represents a payout of roughly $15 billion and a payout ratio of 65% on consensus full-year EPS of $3.19.

Even within the final quarter, which had important disruptions associated to the COVID-19 pandemic, AT&T was nonetheless capable of generate $12 billion in money circulation from operations and free money circulation got here in at $7.6 billion. The corporate usually pronounces a dividend improve for the Q1 quarter in December, and we count on it to proceed its sample of accelerating the dividend, though buyers could solely get a marginal hike as a fraction of a penny.

(Supply: Firm IR)

In September, CEO John Stankey reiterated his confidence that the dividend may be maintained whereas specializing in additional strengthening the stability sheet. The corporate has made progress lately at lowering debt and was capable of make the most of low market rates of interest to increase maturities throughout a spherical of refinancing in Q1. From the latest replace to shareholders:

AT&T has offered steering that it expects a dividend payout ratio at year-end 2020 within the 60s% vary, and it’s concentrating on the low finish of that vary. On the identical time, the corporate plans to proceed to give attention to decreasing its internet debt to strengthen its stability sheet and can stay opportunistic round alternatives to additional enhance its borrowing prices. AT&T has decreased internet debt by about $30 billion because the shut of the Time Warner acquisition. The corporate’s debt maturing inside 4 years has been decreased by about $23 billion in 2020, an enchancment of about $8 billion because the finish of the second quarter. And it expects to shut this month an alternate provide for 42 sequence of notes with maturities from 2031 to 2058 to make the most of favorable market circumstances and alter its debt maturity construction.

Evaluation and Ahead-Trying Commentary

One of many dynamics that we’re is the dividend yield unfold between AT&T and competitor Verizon Communications Inc. (VZ), presently at 3.35%, the widest in historical past between the 2 shares. A case may be made that Verizon deserves to commerce at a premium with a smaller yield given an general extra stable stability sheet with decrease monetary leverage.

Nonetheless, we predict the unfold right here is simply too large and shares of T symbolize a greater worth in comparison with VZ, which can simply be too costly. In Q2, Verizon revenues declined by 5.6% y/y, in line with the weak spot AT&T skilled. Protecting in thoughts that every firm has moved past merely being a telecom supplier with an growth into media, Verizon’s strengths over AT&T are merely overhyped at this level, in our opinion.

ChartInformation by YCharts

Takeaway

AT&T is ready to report its Q3 earnings on October twenty second earlier than the market open. Contemplating the latest share value weak spot and what seems to beneath expectations, we’re bullish on shares that provide compelling worth with upside potential. Indications are that the working and monetary atmosphere are within the strategy of normalizing in comparison with the foremost COVID-19 disruptions within the first half of the yr.

Progress initiatives for the corporate, together with HBO Max and an improve cycle for smartphones pushed by the rollout of 5G broad, spotlight a optimistic outlook. The $30.00 value stage for shares of AT&T seems to be an necessary technical stage the place merchants have drawn the road. A climb-back by the tip of the yr representing a ten% upside is our preliminary value goal.

To the draw back, the primary threat right here past an entire deterioration to the macro atmosphere with a setback to the restoration course of in the US might additional stress shares of AT&T. Weaker developments from the mobility section would additionally pressure a revision decrease to long-term earnings estimates and add to bearish sentiment in the direction of the inventory. Monitoring factors for the upcoming quarter embody monetary margins and the stability sheet place to point protection of the dividend.

Add some conviction to your buying and selling! We kind by +4,000 ETFs/CEFs together with +16,000 U.S. shares/ADRs to seek out the most effective commerce concepts. Click on right here for a two-week free trial and discover our content material on the Conviction File.

Disclosure: I/now we have no positions in any shares talked about, however could provoke an extended place in T over the following 72 hours. I wrote this text myself, and it expresses my very own opinions. I’m not receiving compensation for it (apart from from Looking for Alpha). I’ve no enterprise relationship with any firm whose inventory is talked about on this article.

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