After Earnings, Is AT&T Stock a Buy, a Sell, or Fairly Valued?
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After Earnings, Is AT&T Stock a Buy, a Sell, or Fairly Valued?

Sep 17, 2023

As the company faces slowing growth and lead sheathing issues, here’s what we think of AT&T stock.

AT&T T released its second-quarter earnings report on July 26, 2023, before the markets opened. Here’s Morningstar’s take on AT&T’s earnings and stock.

With its 5-star rating, we believe AT&T stock is undervalued compared with our long-term fair value estimate.

Our $23 fair value estimate assumes modest revenue growth and expanding margins over the next few years due to investments in its wireless and fiber network. The estimate implies an enterprise value of 7.5 times the 2023 EBITDA estimate and an 8% free cash flow yield. AT&T is expected to slowly gain market share over the next few years in the wireless segment, with postpaid revenue per phone customer modestly growing. Wireless service revenue is anticipated to increase by 3% annually on average through 2027, with wireless EBITDA margins holding in the low 40s.

The consumer broadband business is predicted to deliver steadily improving growth as the fiber network buildout matures, leading to an opportunity to sharply increase margins over the next five years. The enterprise service business will gradually return to growth and profitability with cost-cutting balances staying steady along with the loss of higher-margin legacy services.

Consolidated revenue is projected to grow 2%-3% annually, while consolidated EBITDA is expected to grow slightly faster, in the 3%-4% range. AT&T is anticipated to steadily increase free cash flow due to lower capital spending and declining debt leverage in spite of higher cash taxes and a declining contribution from DirecTV.

Read more about AT&T’s fair value estimate.

AT&T’s wireless services are its most important business segment, and returns on capital have declined in recent years due to heavy investments in wireless spectrum and infrastructure. Despite this, we still expect the wireless segment’s returns to remain ahead of AT&T’s cost of capital. AT&T, Verizon, and T-Mobile dominate the U.S. wireless market, collectively serving nearly 90% of retail postpaid and prepaid phone customers. The industry’s scale advantage and high costs of maintaining nationwide coverage limit significant competition and aggressive customer poaching. The carriers have pledged substantial capital returns to shareholders, and they are not likely to disrupt the current pricing structure significantly.

AT&T’s fixed-line enterprise services segment holds a solid competitive position in providing complex communications services to business customers with diverse needs, earning returns on invested capital of around 10%-15%. However, the consumer fixed-line services segment lacks a competitive advantage, with inferior networks compared to cable competitors, resulting in returns on capital estimated to be around 5%. AT&T is also improving its competitive position against cable providers by aggressively expanding its fiber-to-the-premises network.

Read more about AT&T’s moat rating.

AT&T’s Morningstar Uncertainty Rating remains at Medium due to potential liabilities associated with lead-sheathed cabling, leading to expected volatility for investors. The primary uncertainties facing AT&T are regulation and technological advancements. Regulation may intervene if AT&T’s services are insufficient or overpriced, especially in response to weak competition, potentially impacting its wireless and broadband services, which are considered crucial for social inclusion in employment and education. Moreover, AT&T is responsible for providing fixed-line phone services to millions of homes, including rural areas, which might require additional investments even with insufficient economic returns.

Regulators control the wireless spectrum flow, creating scarcity and forcing carriers to pay high prices for licenses. Spectrum policies have been used globally to promote competition, a strategy the U.S. might adopt. On the technology front, evolving wireless standards may lead to more efficient spectrum usage and reduced deployment costs, allowing new firms to enter the market. Cable companies are also exploring opportunities to leverage existing networks for limited wireless coverage, potentially increasing competition. There’s a slight chance that wireless technology advancements could eliminate the need for AT&T’s fixed-line networks, impacting the returns on its fiber investments.

Read more about AT&T’s risk and uncertainty.

This article was compiled by Saaketh Tirumala.

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.