Company in Transition with mixed Fundamentals By TipRanks
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I am neutral on AT&T (NYSE:), 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.
The total number of domestic subscribers to HBO MAX/HBO was 47 million. 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 (NASDAQ: ) each will be able to manage their own industries once the spin-off/merger is completed in the 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 has launched in 39 Latin American territory in June. Next month HBO Max will be in six European countries. In 2022, HBO Max plans to expand its reach to 14 European territories.
Company is seeing strong initial international subscribers activity and expects that new content will be launched in the second half 2021 and first half 2022 to continue growing its subscriber base. AT&T continues to expect to reach 70 million to 73 million global HBO Max and HBO subscribers by the end of 2021.
Value 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.
The forward price/normalized earnings is 8.6x, which is significantly lower than its historical average (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.
One could argue that the stock’s P/E is low and the price-to-free flow are cheap, however, the stock still appears overvalued relative to its historical EV/EBITDA.
Investors looking for a good value investment that yields a decent dividend may find it appealing here. However, a pullback might make the play more compelling.
Disclosure: Samuel Smith had no position in the securities listed in this article at the time it was published.
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