Is AT&T Stock A Buy Before Upcoming Earnings? (NYSE:T)

AT&T To Merge Warner Media With Discovery

Justin Sullivan

For the past few years, AT&T (NYSE:T) has been undergoing a business transformation, and the recent spin-off of Warner Bros. and its combination with Discovery (WBD) has allowed the company to focus on its core telecom business. T is expanding its footprint focusing on the fiber broadband and 5G markets while reducing its exposure to the legacy copper wired business and shutting down its 3G network. The company should be able to save costs by reducing its legacy copper business and repurposing it for fiber and 5G network expansion. T’s revenue should also benefit from a rising subscriber count given the increased demand for faster connectivity, increased data consumption, and the company-specific initiatives to increase market penetration and drive growth. The stock is a good defensive bet and its stock price has outperformed the broader market in recent months. While I am not expecting many surprises from Q2 earnings, I believe commentary on the 2H22 and FY23 outlook should be upbeat. I believe now is a good time to buy the stock before its turnaround initiatives start gaining traction and begin showing in earnings results in the second half of this year and the next year.

T Stock Key Metrics

The average revenue per user (ARPU), subscriber and connection growth, churn rate, and EBITDA margin are some of the important metrics for AT&T. The number of subscribers in the mobility segment has risen steadily over the last three years, from 154.7 million in the first quarter of 2019 to 196.6 million in the first quarter of 2022. This was due to an increase in both postpaid and prepaid customer subscriber counts. In Q1 2022, the postpaid phone net add was 691,000, excluding the impacts of 3G network shutdown of more than 400,000 postpaid phones. The mobility segment’s revenue increased by 5.5% year over year in Q1 2022 with 4.8% growth in the service revenue due to subscriber growth. During Q1 22, the postpaid phone churn rate was 0.79%, indicating that the company was able to improve its customer experience, resulting in better customer service and improved NPS (Net Promoters Score). Due to promotions, the postpaid phone-only ARPU was $54 in Q1 22 which was lower than Q4 2021 ARPU of $54.06 and $54.10 in Q1 2021. The EBITDA margin of the mobility segment fell 290 basis points from 42.3% in Q1 2021 to 39.4% in Q1 2022 due to increased operating expenses associated with the 3G network shutdown.

The Business wireline segment’s EBITDA margin declined 70 basis points year over year to 38.3% in Q1 2022 as a result of revenue decline. However, I am optimistic about the margin outlook given the company’s transformation process and proactive rationalization of low-margin products. Fiber broadband connections have increased from 3 million in Q1 2019 to 6.3 million in Q1 2022 in the consumer wireline business. In Q1 2022, the broadband ARPU grew 5.9% with a 3% growth in the Fiber ARPU. The Fiber ARPU during the quarter was $60.41 compared to the overall broadband ARPU of $56.66.

The following tables contain key metrics for each of the three segments – Mobility, Business Wireline and Consumer Wireline.

AT&T Mobility Key metrics

AT&T Mobility Key metrics (Company Data, GS Analytics Research)

AT&T Consumer Wireline Key metrics

AT&T Business Wireline Key metrics (Company Data, GS Analytics Research)

AT&T Consumer Wireline Key metrics

AT&T Consumer Wireline Key metrics (Company data, GS Analytics Research)

When Does AT&T Report Earnings?

AT&T will release its second-quarter FY22 results before the market opens on July 21, 2022. On the same day, at 8:30 a.m. Eastern Time, the company will host its conference call to discuss its results. Investors can expect management to discuss the impact of 3G shutdowns on customer base and EBITDA margin, absence of CAF II reimbursements, ARPU growth in the postpaid business, the effect of recently implemented price increases on legacy plans and the potential of further price hikes, the effect of the company’s transformation program and cost-takeout strategy on EBITDA margin, and improvement in fiber ARPU by getting rid of the 12-month promotional pricing and introducing simplified pricing structure.

Is AT&T Expected To Beat Earnings?

Since Q2 2022 is the first quarter since the separation of the Warner Media business, I am not expecting too many fireworks in the upcoming earnings release. Post-separation, the company now has a relatively strong balance sheet and is in a better place to step up its investments in 5G and fiber products which can accelerate T’s subscriber count. I believe the company did increase its investment in Q2 2022. However, it will take some time for the results of these investments to show up in the earnings. So, I am not expecting many surprises in Q2. However, I expect upbeat commentary on subscriber growth in the second half of FY22 and FY23. The second half of this year should also have easier comparisons due to the lapping of 3G shutdown costs from the second half of 2021.

I believe now is the right time for investors to buy the stock before the upcoming acceleration in subscriber growth and easier comparisons start getting reflected in the results and expect the stock price to increase over the next 18 months as the company’s turnaround initiatives become more visible.

How Is AT&T Doing Financially?

In April 2022, AT&T completed the sale of WarnerMedia and received ~$40 bn in cash and WarnerMedia Discovery’s retention of certain debt at close. The company plans to use these proceeds as well as significant free cash flow from operations to reduce debt and get its net leverage ratio below 2.5x by the end of FY23. In addition, the company is also planning ~$24B in Capital Investment in ‘22 and ‘23 to drive growth.

The standalone (i.e., excluding WarnerMedia and other dispositions) revenue of AT&T increased 2.4% Y/Y to $29.7 bn and the adjusted EPS improved 8.6% Y/Y to $0.63 in the last quarter. The revenue growth in both wireless and broadband businesses contributed to Q1 22’s revenue increase, partially offset by declines in Business Wireline. The adjusted EBITDA margin declined 90 bps Y/Y to 34.3%. The adjusted EBITDA margin was down Y/Y as lower retained video costs were offset by peak impact from 3G network shutdown, continued investments in wireless and fiber, and the launch of multi-gig fiber plans. However, the adjusted EPS in the quarter improved due to higher equity income from DIRECTV and lower interest expense.

The company has given encouraging revenue and earnings growth targets for FY22 and FY23 and I believe the investors will be closely watching the company’s progress towards these goals.

AT&T's FY22 and FY23 guidance

AT&T’s FY22 and FY23 guidance (Management Commentary)

What Is AT&T’s Long-Term Forecast?

Secular growth prospects in the fiber-wired business

The company is seeing good growth in its fiber-wired business. In 2021, for the fourth consecutive year, the company added more than 2.6 million customer locations and more than 1 million fiber subscribers, thanks to a faster build rate. Two-thirds of the net adds were new to the AT&T broadband. This was due to the increased penetration rate. The penetration rate in Q1 2022 was 37% compared to that of 29% in Q1 2019. The consumer wireline segment’s revenue is benefitting from an increase in broadband revenue and increased pricing, which is partially getting offset by a decline in legacy voice and data services as the number of customers continue to decline.

AT&T’s Fibre broadband connection

AT&T’s Fibre broadband connection (Company data, GS Analytics Research)

The company is undergoing a transformation that aims to sharpen its network, improve customer experience, and streamline back-office operations. This program is assisting AT&T in transforming its legacy or copper network by lowering fixed and variable costs associated with the legacy business, allowing the company to maintain margins and simplify operations. By 2025, the company intends to reduce its copper footprint by 50% and rationalize its $6 billion cost base in the process. Parallel to this reduction, the company will expand its fiber wireline footprint by deploying more fiber networks.

AT&T’s media division was recently spun off, allowing the company to refocus on its core telecom businesses. The current demand for high-quality bandwidth, greater speed, and lower latency from consumers, small & medium businesses, and enterprise businesses is increasing as a result of the need for seamless digital operations. With the installation of smart devices, homes are becoming smarter, requiring the use of flawless, high-quality broadband. The demand for traditional broadcast formats (cable) is shrinking as more people opt for unicast streaming (OTT platform). Work-from-home options for U.S. employees following the pandemic are another factor driving demand. This increase in demand is resulting in higher data consumption, which should benefit AT&T.

Small and medium-sized businesses, in addition to home users, are consuming more data. New startups and other businesses require faster connectivity and a secure network, which AT&T’s fiber and FirstNet security network can provide. As the company expands its fiber reach, it should seize the opportunity to grow connectivity with SMBs to stabilize its Business wireline unit. Enterprise businesses are moving toward automation and gaining access to new technologies, which necessitate secure bandwidth and high-speed internet to run operations smoothly. Currently, 50 million households and 10 million business locations in urban and suburban areas that are prime for fiber are not covered. This provides AT&T with a strong growth vector.

In January 2022, the company launched its multi-gig speed plan which is gaining traction among the customers of AT&T and is expected to act as a tailwind for ARPU growth in the future.

With its multi-gigabyte speed performance roll-out, the company plans to almost double its fiber footprint by 2025, and its fiber network should cover more than 25 million customer locations, 4 million small businesses, and 1 million enterprise locations. For more than 100 metro areas, this multi-gig product provides symmetrical 2-gig and 5-gig speeds. By 2025, the company plans to spend $3 billion to $4 billion per year to reach the 30 million-plus locations it has targeted. The expansion of the fiber networks should accelerate the broadband service growth of the company. As the company pivots from its legacy copper-based products to fiber we should expect mid to high single-digit growth in the broadband revenue, partially offset by a decline in legacy voice and data products.

AT&T Fiber Customer locations

AT&T Fiber Customer locations (Company data, GS Analytics Research)

Wireless network and 5G

In 2021, over 3 million postpaid phone net adds were supported by strong network performance and a good go-to-market strategy. Due to improved customer experience, postpaid phone churn during the period was 0.76%, the lowest in the last five years. The company refocused its strategy to retain existing customers and acquire new customers over the last two years by assisting customers in selecting the right plans and offering higher-value plans, which helped them lower its churn rate. Because of increased demand, better customer service, and increased promotions and advertising, the total subscriber count has been increasing for the past few years.

AT&T Postpaid phone Net Additions

AT&T Postpaid phone Net Additions (Company data, GS Analytics Research)

As a result of its recent expansion, AT&T now covers more than 2.9 million square miles. Because of the company’s low band spectrum holdings, the wireless investment strategy started with a significant coverage advantage in square miles. Low-band spectrums (frequencies below 1 GHz) can cover large areas, and travel indoors and outdoors leading to good propagation characteristics. This allows AT&T to efficiently deploy its 80 MHz mid-band spectrum holdings. Under AT&T’s one tower climb strategy, the 40 MHz spectrum from Auction 110 and the 40 MHz spectrum from C-band phase 2 should be deployed in 2022. As of March, AT&T’s 5G footprint covered more than 255 million POPs in more than 16000+ cities and the company plans to deploy more than 200 million POPs using the mid-band spectrum by the end of 2023.

The fiber network is expected to act as a backbone for the company’s 5G wireless network business. The company should be able to cross-sell its wireless products within the fiber footprint. As the fiber business develops, it should benefit the company’s wireless business as well. The company is decommissioning its 3G network and should redeploy the spectrum for the transition to 5G services. Although 5G services are still in their development stage, we should see good growth in the company’s service revenue as we move ahead. I believe the company should be able to meet its FY23 targets and we should see growth continuing beyond FY23 as well.

Is T Stock A Buy, Sell, or Hold?

AT&T is a good buy at the current levels. The stock is trading at 8.16x FY23 EPS estimates of $2.52 and has a forward dividend yield of 5.40%. The company’s valuation is a slight discount versus Verizon (VZ) which is trading at a FY23 P/E of 9.22x. I believe the company should be able to reduce some of the valuation gap as it makes progress towards its turnaround.

I think the company’s low valuations, defensive nature, high dividend yield, and prospects of improvement in business make T stock a good investment. In addition to a high dividend yield, it also provides a potential for capital appreciation amid the current uncertain macro environment.

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