Among its mega-telecoms brethren, AT&T has always managed to underperform. It has had its moments, appearing to make a bid for leadership within its subgroup, only to disappoint and return to mediocre status. Large companies tend to have problems when the market demands that they quickly change direction, and AT&T seems to have been stuck in that gear for nearly a decade. Share prices have hovered between $25 and $45, never really showing signs that it has turned a corner. John Stankey, its COO, was promoted to CEO in July 2020. Analysts and investors are expecting major strategy changes and growth. AT&T shares have hovered about $30 for the subsequent months, but recently dipped down below $28.
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The saving grace for this enterprise is that it is a consistent dividend payer. In spite of its admirable 7.4% dividend yield, many analysts shun the stock, perhaps because of its poor track record of under-performance and the fact that the telecoms giant will be in transition, searching for a formula that works for the long term.
Source: CNN Money
Its management team has already conceded that single-digit growth will be the name of the game over the next five years – not exactly a ringing endorsement for the long haul. Will AT&T turn things around? With a market cap of $201bn, the turnabout could take some time, but analysts do see appreciation in the company’s stock price going forward. On the optimistic side of projections, favorably inclined analysts predict that a $37 share price is possible one year out, but critics see more declines in the picture, down into the $21 region. Take your pick.
AT&T had its start in 1983 as SBC (Southwestern Bell Corporation) Communications Inc. in Dallas, Texas. In 2005, it rebranded by contracting the old American Telephone & Telegraph mark to AT&T Inc. The company has always been in the telecommunications business in one fashion or another, but at times, it has struggled with its identity, expanding into various unrelated market segments, only to meet with tepid results and having to divest or sell off these disparate assets.
The firm can actually trace its roots back to Alexander Graham Bell and his initial venture in 1882. From that humble beginning, the company eventually had a monopoly on telephone services in the US, but an antitrust lawsuit in 1982 forced the behemoth to divide into seven regional operating companies, commonly referred to as the ‘Baby Bells’. One of the seven entities, Southwestern Bell Corporation, changed its name, acquired the assets of its former owner, and chose to become AT&T Inc. from 2005 forward.
Today, AT&T is considered the world’s largest telecommunications company. It has also taken the lead as the largest distributor of mobile phone services in the US and is ranked as the ninth entity in the Fortune 500. This multinational giant has 230,000 employees at last count in 2020, serving its corporate interests in 59 countries across the globe. Revenues for the trailing 12 months stand at $176bn, but the company recorded a loss for that same period due to the impacts of the COVID-19 pandemic. Revenue growth, however, for the second quarter over the same quarter of a year ago was up 7.6% – a good sign going forward.
Today, AT&T has three operating units. Telecommunications accounts for nearly 80% of its revenue. The WarnerMedia division is responsible for developing, producing and distributing feature films, television, gaming and other entertainment content. It comprises 17% of the revenue base. Lastly, AT&T has a Latin American division, which delivers the remaining 3% of the multinational’s total revenue base.
As of July 1, 2020, AT&T elected to make a major change at the helm. John Stankey, the existing COO for the conglomerate, became CEO, replacing Randall Stephenson. Stankey’s predecessor had focused on expanding the business by acquiring new business lines. The Street is expecting a change in policy, and Stankey wasted no time communicating his outlook. His intent appears to be to grow revenue from internal sources by selling off unrelated businesses, leveraging existing assets, and focusing on the firm’s primary business line: telecommunications.
Conglomerates must often endure this ‘accordion’ style of management scenario after an era of expansion has bloated the balance sheet with debt and consumed valuable management time in absorbing disparate corporate cultures within a single framework. Eventually, a company, as the expression goes, must focus on its knitting. AT&T is making moves in this direction, which is what investors and analysts want to see, but they must be patient. Transitions take time, but AT&T has almost perfected this management style, having made a multitude of acquisitions and divestitures in its past. The question will be, how quickly can the company swing the ship around?
Is AT&T a good stock to buy? The conglomerate has always maintained a quality mystique and has been a favorite of dividend investors for good reason. As it rearranges its deckchairs, will Wall Street be patient or beat a path to its more capable competitors at the moment? Analysts seem confident that the company has positioned itself well for a successful 5G rollout, but the jury is still out as to how its rollout will compare to other firms. AT&T shares have been on a downward trend since mid-May, but hope springs eternal. Expectations are that it will rise.
Despite the fact that AT&T shares have been hammered down nearly 10% over the past two months, analysts have not run for the hills. According to a poll conducted by MarketBeat.com, there still remain seven analysts who support a ‘Buy’ and an equal number who support a ‘Hold’ for this stock. There are only three of this community who are broadcasting a ‘Sell’.
AT&T’s new CEO has a leash, but not a long one, to run with a new strategy, one that divests unnecessary assets and uses the proceeds to pay down debt accumulated from prior purchases. He has already announced a deal to spin off its DIRECTV and U-verse business lines into a new entity, while retaining 70% of the ownership in the new company. TPG will own the other 30% and pay $1.8bn for the privilege. The announcement was made in February, but AT&T’s share price barely moved, sticking around the $29 level.
In May, AT&T announced that it was structuring a deal to spin off WarnerMedia for $43.4bn in a combination with Discovery. The deal has yet to be approved, but the market reaction was a quick rise on the news, followed by an even quicker sell-off. Shares spiked over two weeks, piercing $30, peaking above $33, but then falling back below $30. The share price has tried valiantly to remain above $31 on several occasions, but failed with each pass. Before the COVID-19 pandemic, it was trading at a lofty $36 a share, but the past is the past.
What is the AT&T stock forecast for the next three months? Q2 earnings for the period ended June 30 have already been put to print. AT&T beat estimates on several data points. Revenue, adjusted EPS, and additional postpaid phone subscribers beat street expectations, the latter auguring well for when telecommunications is more than 80% of the business after divestitures.
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Although the short-term chart depicted above reflects a continuing downward trend, analysts believe that the balance of 2021 will show improvement over the first half. According to Jim Pearce of Investing Daily’s Personal Finance: “I believe it will pick up momentum during the second half of this year. AT&T is a buy up to $33.”
How do AT&T stock forecasts shape up 12 months out? Current share price predictions bear out the sentiments of the previously quoted analyst. The $31 threshold that the firm has assaulted on several occasions over the past 12 months or more no longer presents the resistance going forward in the minds of supportive analysts, as per this polling from CNN:
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The median target for 22 analysts who follow AT&T is at $31.50, with a high case estimate of $37 by July 2022. From a technical perspective, one could argue that a gradual upward trend did have its starting point roughly nine months back – honeymoon optimism, if you will – following the appointment of a new CEO. The correct message emanated from the AT&T Board of Directors, and the Street liked what it heard: focus on the core business, divest unneeded assets, and pay down debt.
The plan is right for this time, but can the management team make it happen? A healthy number of critics think not, if the $21 forecast is representative of that thinking. AT&T does not act within a vacuum. It has many very competent competitors. Of the seven firms that comprise its grouping, IBD Stock Checkup gave AT&T a low ranking of six among providers in its industry group. AT&T may rank fourth in terms of share price performance, but firms such as Lumen Technologies (LUMN) and IDT Corporation (IDT) are the leaders at the moment. Investors may prefer these other options.
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For a longer-term look, the weekly price chart for the past decade provides a few cogent insights. AT&T’s stock forecast out to 2025 begins with its past history. It must build upon that foundation, while also taking into account the fundamental changes that its new CEO is trying to implement. The company hit its zenith for the decade in 2016, but a major decline commenced in 2017, finally hitting bottom in 2020 after COVID-19 took its toll. CNN stated at that time: “AT&T’s stock performance from January 2018 through the end of October marked its worst performance since the financial crisis in the decade prior.”
AT&T shares on a weekly basis have been basically range bound after COVID-19 impacts were absorbed. Analysts have resorted to computer models and artificial intelligence algorithms to build a semblance of authenticity when preparing their five-year forecasts. These methods chart a course that could be as low as $21 on the low end, the pessimistic viewpoint, or $43 on the upside, the view of AT&T loyalists.
AT&T’s CEO barely has a full year under his belt at his new post. His directives to date seem on point, but there will always be performance risk. AT&T has worthy competitors, but its data for the last two quarters have been above expectations. More good news needs to follow, since it may take two years for a full transition to take hold. Technically, AT&T shares are trading below its 200-day moving average, which only suggests that there is upward potential if this management team can perform as billed. Lastly, AT&T is well positioned. Ben Reynolds of Sure Retirement noted: “AT&T has a competitive advantage with its entrenched position and immense scale.”
Is AT&T a good stock to buy at this point in time? AT&T’s shares have been in freefall since 2017. For the same period, the S&P 500 index has nearly doubled. Investors have not been happy, and a 7.4% dividend can only go so far to restore confidence in the company, its leaders, and the direction it has chosen. It appears at long last that this supertanker has turned a significant corner. Its determined and newly appointed CEO, who is not new to the AT&T malaise, has charted a course that has legs. AT&T enthusiasts can finally breathe a sigh of relief.
It is not time, however, for celebration. The telecommunications business is a commodity, and commodity businesses have tight margins and fierce competition. The strategy for winning is always scale and more of it. Unfortunately, AT&T is in transition. Revenue forecasts are in the low single digits. Unnecessary assets are being divested to pay down its debt load, but it must step up its growth and its operating margins to hit the targets that the Street expects. At less than ‘10X’ its forward earnings, AT&T shares seem undervalued. There is upward potential, but can it achieve a new standard of excellence and maintain it, or will it slip into its old mediocre pattern?
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Justin is an active trader with more than 20-years of industry experience. He has worked at big banks and hedge funds including Citigroup, D. E. Shaw and Millennium Capital Management.