AT&T (T) Earnings Check: Is the Telecommunications Giant a Buy or Hold Before the Report?

Telecommunications behemoth AT&T Inc. (T) is set to unveil its third-quarter earnings before the market opens on October 19, 2023. For the fiscal third quarter (ending September 2023), analysts expect the company’s revenue to increase marginally year-over-year to $30.24 billion, while its EPS is expected to decline 8.6% year-over-year to $0.62.

The company foresees a third-quarter free cash flow between $4.5 billion and 5 billion, while for the full year, a minimum of $16 billion in free cash is expected to be generated.

With a market cap surpassing $102 billion, T retains its prominence within the telecom industry as the third-largest U.S. wireless carrier, boasting 70 million postpaid and 18 million prepaid phone customers.

During the fiscal second quarter of 2023, the company generated operating revenues of $29.92 billion. T has established a significant presence in Mexico with around 22 million subscribers. However, it accounts for only 3.2% of the total revenues.

The post-pandemic landscape has seen U.S. telecom market growth decelerate significantly, with competitors attempting to lure customers through cheaper plans in this fiercely competitive market. However, the second quarter showed signs of improvement from the first quarter, attributed to the success of a cost-cutting initiative that stripped over $1 billion from operating expenses through strategies such as office location reductions.

With its $6 billion cost reduction target achieved earlier than anticipated, T is now setting sights on slashing another $2 billion over the next three years.

In the second quarter, T saw an additional 326,000 postpaid phone subscribers, about 60% less than the prior-year quarter. This downturn can be linked to increased competition within the industry, slow smartphone sales, and ongoing headwinds concerning consumer spending. The situation may further deteriorate with Amazon’s recent venture into the wireless market through a partnership with Dish Network.

The company’s mobility segment, providing extensive nationwide wireless service and equipment, continues to amass subscribers, though at a somewhat muted pace. Mobility subscriber count grew 12.6% year-over-year to 229 million subscribers.

While T's fiber business growth may not be rapid enough to counterbalance the ongoing downturn of its wireline unit, the segment is showcasing remarkable performance. The second quarter saw an increase of 251,000 fiber subscribers, marking the segment's 14th consecutive quarter of gaining at least 200,000 new customers.

However, T is confronting questions concerning the safety and environmental disadvantages of its lead-sheathed copper cables. Replacement of these outdated cables could necessitate multi-billion-dollar expenses, diminishing its FCF and compelling reduction in dividends.

Moreover, as Pay-TV subscriptions consistently diminish, T is assessing alternatives for DirecTV, which has been losing subscribers due to competition with streaming networks. The second quarter witnessed a loss of approximately 400,000 customers, reducing its overall customer base to 12.4 million. The dwindling subscriber numbers have triggered a decrease in the cash distribution T derives from DirecTV.

T's debt escalated significantly over recent years, owing to acquisitions of DirecTV, TimeWarner, and advanced wireless services (AWS-3) spectrum licenses financed by borrowed funds. As of June 30, 2023, the telecom titan's total debt was $143.28 billion, compared to $135.89 billion on December 31, 2022.

With the escalated inflation, alarms are being raised about potential interest rate hikes leading to extravagant borrowing costs for T. A rise in borrowing costs could affect T’s profitability and cash flow. Additionally, swelling inflation undermines consumers' purchasing capacity – significant given T's heavy reliance on consumer subscriptions and spending. A slowdown in consumer spending could adversely impact T’s total revenue and stock price.

Nevertheless, T aims to slash its total costs by $2 billion over the forthcoming three years to reduce its net debt-to-adjusted EBITDA ratio to 3x by 2023 and further to 2.5x by 2025's end.

Despite hiccups like poorly-timed acquisitions, slow growth, cost-cutting, and complications with its lead-sheathed cables, T exhibits prospects for development underpinned by its robust profitability. The company’s trailing-12-month cash from operations of $37.04 billion is significantly higher than the industry average of $254.23 million. Its trailing-12-month EBIT margin of 23.02% is higher than the industry average of 8.32%.

T’s notable attribute is its unwavering dedication to shareholder's interests. The company pays a $1.11 per share dividend annually, translating to a 7.73% yield on the current share price. Its four-year dividend yield is 7.09%.

However, it is critical to acknowledge that T's share prices have tumbled 22% year-to-date, and the stock currently trades below its 100-day and 200-day moving averages of $14.96 and $16.83, respectively, indicating a downtrend.

Nevertheless, Wall Street projects a potential uptick in the stock value, estimating it to reach $20.11 in the next 12 months, indicating a potential upside of 40%. The price target ranges from a low of $17 to a high of $25.

Several institutions have recently modified their T stock holdings. Institutions hold roughly 54.7% of T shares. Of the 2,549 institutional holders, 1,087 have increased their positions in the stock. Moreover, 165 institutions have taken new positions (37,409,084 shares).

Bottom Line

T is currently contending with a significant debt burden. Despite assertive strategies to cut costs and lure subscribers through cost-effective packages, the company is shrouded in substantial uncertainty.

Adopting an entirely pessimistic perspective on its stocks may not be wise, considering its attractive valuation, robust profitability, and consistent dividend payments. Amid the market instability, T emerges as an appealing defensive investment.

The firm proactively addresses fiscal issues, including high liabilities and debt, through strategic debt reduction. Although the market may not skew in favor of T soon, investors could wait for a better entry point in the stock.