https://seekingalpha.com/article/4471161-att-stock-peak-absurdity-long-term-investors-entry-point
3 replies (most recent on top)
I subscribe to Seeking Alpha as well. These are not sureties but analysts who contradict one another. Bottom line is, who knows what will happen?
"The current valuation of AT&T is where the absurdity I referenced is reflected. The company as of today is valued at a PE ratio of 7.18 using 2021 estimates. The company is currently priced as if it will be filing for bankruptcy shortly.
The closest AT&T peer, Verizon Communications (NYSE:VZ), is currently valued at a PE ratio of 9.45, which is also historically near lows, yet is still 31% higher than AT&T. I would argue that the post-merger AT&T is equal to or in fact better positioned than Verizon given that post-merger the debt loads are likely to be similar or perhaps even tilted in AT&T's favor in addition to the momentum AT&T currently enjoys with subscriber growth."
Yeah, Toxic T's price reflects the Ratty and Stink's mismanagement and especially the Stink. BoD - you incompetent I D I O D T S - get rid of the Stink and T's price will pop. M O R O N S!
Summary
• AT&T has continued its seemingly never ending march lower. Losses have accelerated of late byway of a sharp 12% drop recently and are currently residing at only $24.13 a share as of 11/21/21.
• Operationally, it appears the company is actually in very good condition, with strong results in telephony, mobile adds and fiber additions.
• Capitulation may be near as the company has been dropping directly in the face of encouraging results and moves by management to refocus the company.
tolgart/iStock via Getty Images
AT&T (NYSE:T), the company everyone loves to hate, put another rung in the "how low can you go" limbo bar recently by precipitously losing a further 12% from early October to today.
In this article, I would like to discuss why this drop could be a sign that peak absurdity may be near and why long term investors may find this to be a solid entry point.
Overview
By this point, I would venture to guess that everyone reading this is aware that AT&T has been one of the worst performing investments you could possibly make over the past 25 years.
Data by YCharts
Capital appreciation has been exactly zero going all the way back to the mid 1990's. The company has long been considered one of the worst management teams in the business. For good reason. The company has made numerous errors in judgement for decades and has largely squandered the advantageous investor perception it once held in telephony and connectivity.
From the empire building of the Direct TV acquisition to the sheer arrogance of the Time Warner purchase and subsequent micro management of the group, past management teams have left a strong stench of incompetency wafting in the halls of the C-Suite.
Capital has been severely mismanaged over the last few decades at AT&T and investors far and wide have every right to be absolutely furious at the current state of the stock price, including yours truly. However, simply being furious and then making an emotional decision to sell, at what is nearly certainly a large loss, are two completely different actions.
What current and prospective investors in AT&T should do is to closely examine the recent actions of the current management team, led by John Stankey and determine what the future AT&T is likely to look like.
Management Actions
Since assuming the role of CEO in July of 2020, Mr. Stankey, in my opinion, has made numerous positive moves aimed at refocusing AT&T on the core business of connectivity and telephony.
Mr. Stankey has spent much of his time as CEO so far pruning non-core businesses away from the company. He has sold or wound down a large portion of the ancillary pieces of AT&T, highlighted by the Puerto Rican asset sale to Liberty Latin America (NASDAQ:LILA), among many others.
In addition, Mr. Stankey has rid AT&T of the Direct TV business via a deal with TPG Capital. Direct TV has long been a source of ridicule and distraction for the company and this deal gives AT&T 70% equity ownership of the new entity along with a $7.1 billion cash infusion, along with the ability to remove the steep revenue drops each quarter from the company's books.
In what appears to be the most transformative news, Mr. Stankey and the legendary John Malone in May of 2021 agreed to merge and spin off Discovery, Inc. (NASDAQ:DISCA) and WarnerMedia into a combined media powerhouse.
In conclusion, Mr. Stankey's actions since he became CEO certainly seem to indicate that he is in fact quite serious in his attempt to turn the page from the mistakes of the past and to refocus the company back to the core telephony and connectivity business.
Looking at purely the business results, since Mr. Stankey's appointment as CEO, the business has made significant strides in gaining back some of the ground lost to competition. In fact, in the last few quarters, AT&T has led the industry for wireless additions.
Source: AT&T
The New AT&T
The AT&T of 2020 and the AT&T of mid-2022 will be two completely different organizations. Once the spin-off of WarnerMedia is completed in mid-2022, the company will be left with a clear corporate mandate from top down, to strive to be the most efficient and best telephone and internet provider in the business.
In addition to refocusing the management team, the company will have a vastly cleaner balance sheet. Management has indicated clearly that the debt balance is a very high priority and that deleveraging is a top priority for the company.
The structure of the future company looks like this idea does in fact have legs as post the WarnerMedia spin-off, AT&T looks to have roughly $166 billion in total short and long term debt. In Addition, AT&T expects to produce over $20 billion in free cash flow under its new structure ex Warner Media.
AT&T has indicated that the dividend, post spin-off would be set around 40-43% of free cash flow or around $8-8.6 billion. Using a midpoint of $8.3 billion in available free cash for the dividend and the current 7.14 billion shares outstanding, I come up with a dividend of $1.16 per share, indicating a 4.8% yield at a $24.13 price.
One must not forget that each share of AT&T you own will also grant you ownership in the new WarnerMedia company to be spun off. How these shares are valued has yet to be determined other than AT&T shareholders will own 71% of the newly combined company with Discovery.
Valuation
The current valuation of AT&T is where the absurdity I referenced is reflected. The company as of today is valued at a PE ratio of 7.18 using 2021 estimates. The company is currently priced as if it will be filing for bankruptcy shortly.
The closest AT&T peer, Verizon Communications (NYSE:VZ), is currently valued at a PE ratio of 9.45, which is also historically near lows, yet is still 31% higher than AT&T. I would argue that the post-merger AT&T is equal to or in fact better positioned than Verizon given that post-merger the debt loads are likely to be similar or perhaps even tilted in AT&T's favor in addition to the momentum AT&T currently enjoys with subscriber growth.
AT&T is projecting earnings per share growth, post merger, of mid-single digits. If you can assign a roughly 5% dividend yield to 5% potential EPS growth, shares currently, with the Warner Media spin valued at 0$ appear to be fairly valued.
Of course, the new WarnerMedia will not be valued at $0. The combined business is estimated to have produced over $28.2 billion in revenue and an estimated $6 billion in free cash flow in 2020.
Estimates of the equity value of the new WarnerMedia vary wildly but the consensus estimate is between $7-10 per share of value is to be spun off to shareholders. If this holds true, then at current valuations, AT&T post-merger is to be valued at between $14 and $17 per share.
This is absurd. EPS estimates have already been put together by the analyst community reflecting the spin off and AT&T is expected in 2022 to earn $3.20 per share. Using a mid-point of $15.50 price post spin, the company is potentially valued at a 4.84 PE ratio.
I can see no logical argument for that type of valuation for a company projected to continue growing at mid-single digits, with an improved balance sheet and no true threats to its overall business.
Bottom Line
AT&T is a victim of its past and in the utter lack of confidence in the company by the investing community to do what it says. In this case however I find it hard to believe that the company can truly mess this up to a large degree considering the majority of the hard work has already been done in 2020 and so far in 2021.
AT&T has refocused itself to become solely a telephony and connectivity business and with the WarnerMedia spin off likely closing in the next few quarters, the potential for significant returns is currently present in the stock.
Look, I do not like the fact that my cost basis for AT&T is near $30 and I am deeply in the red personally, but the last thing I am about to do at this time is to sell my shares in a company that is currently doing the correct things to right the ship and is selling at what I consider to be fire sale prices. In fact, at the current levels, I plan to increase my sizable position even further.
Sentiment is a funny thing in the market, it is not rational, fear begets fear and declines tend to snowball in names like AT&T because investors have been burned and they assume it can and will get even worse.
I do not have a crystal ball and given the extremely low market sentiment in the company, certainly the share price can go lower still, however, from what I see, this decline is not rooted in any current fundamental business deficiencies at the company and instead is a pile on for past offenses which could signal capitulation and in my opinion presents a major opportunity for long term investors.