AT&T reported 23Q2 results that slightly exceeded guidance and consensus estimates. The results also raised confidence that the company can achieve its 2023 free cash flow target of $16 billion.
Its key end markets, prepaid wireless service and broadband, have matured in many geographies, limiting its growth potential and potentially intensifying competition. The company is responding by focusing on cutting operating expenses, reducing its real estate footprint and replacing legacy copper infrastructure. In 23Q2, it achieved its $6 billion cost savings target and aims to realize $2 billion more over the next 3 years.
In 2024, AT&T will complete the rollout of mid-range C-band spectrum, bringing faster connectivity, greater bandwidth, lower latency and new use cases to its 5G mobility network. It is also expanding its broadband coverage to win new subscribers and increase the network’s data capacity. Its Gigapower joint venture (with Blackrock) aims to bring broadband to areas outside of its service territory, potentially tapping $42.5 billion of funding from the Federal government to expand affordable broadband service.
A WSJ exposé on lead-sheathed cables has raised concerns that AT&T (and its peers) may face billions of dollars in remediation costs. However, the company asserts that these cables, which have been in use for decades, are safe. The EPA and certain state and local governments are now examining the issue. AT&T may have to spend more to remediate certain problem areas, but it is unlikely, in my view, that such costs will be devastating to the company and its shareholders.
AT&T’s stock has fallen 21.5% YTD vs. the S&P 500’s 19.3% gain. Most of the selloff occurred after 23Q1 results on disappointing free cash flow which raised concerns about its leverage and dividend sustainability. The stock took another dive after the WSJ exposé, but showed little response to 23Q2 results that put the company back on track to meet its 2023 free cash flow objective of $16 billion.
I am initiating coverage of AT&T with a Buy rating and price target of $18. The price target is based upon an assumed one-year forward P/E multiple of 8 times projected 2024 GAAP earnings of $2.23 and 7 times projected 2024 non-GAAP earnings of $2.51. From the current share price of $14.45, my $18 target price equates to a potential total return of 32%, including the stock’s 7.7% dividend yield.
This is a summary of my recent report on AT&T Inc. (T). To receive a copy of the full report, please reach out to me using the contact information provided below.
July 31, 2023
Stephen P. Percoco
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