July 16, 2018 - 11:07am EST by
2018 2019
Price: 31.67 EPS 3.40 3.40
Shares Out. (in M): 7,349 P/E 9.3 9.3
Market Cap (in $M): 232,000 P/FCF 10.6 9.8
Net Debt (in $M): 175,000 EBIT 30,241 32,568
TEV (in $M): 420,000 TEV/EBIT 13.4 12.5

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The stock price of AT&T, the phone company, has been battered down to six year lows and a 6% dividend yield amid angst over their Time Warner (TWX) acquisition, and the associated shareholder rotations, regulatory wrangling, and transaction financing.




Several factors are weighing on the stock:


  • Shareholders:  Merger Arbs have unwound positions now that TWX has closed, and T stock issued in payment to TWX holders is under distribution.

  • Legal:  The DOJ has announced their intention to appeal the lawsuit opposing the acquisition.

  • Balance Sheet:  Net Debt level, though manageable at 3.2x ebitda, is sizeable.

  • Growth:  Wireless growth has slowed industry-wide.

  • Uncertainty:  Cord cutting and direct to consumer streaming / OTT (Over The Top) business model transitions make the long-term future less clear (though, I will add, not necessarily less profitable).




The AT&T Conglomerate is truly supertanker size.  Revenues of ~188B break down into:


77B wireless / 40B wireline / 40B Pay TV (DirecTV) / 31B Media (Time Warner:  CNN, TBS, HBO, Warner Bros).  Before you write off wireline, consider that back in 1992-93 when hardly anybody was on the internet or had a cellphone the company did ~20B in Revenues.  Even with the baby Bells included, the category has grown materially, at least in dollars if not phone lines. 




Strategically, there is dubious value to the AT&T/TWX deal given it seems to be a hedge for whatever may come in the future OTT world.  This is similar to their DirecTV acquisition in 2015, which didn’t materially help create customer acq synergies.  They can now pursue DirecTV NOW as a streaming service and seek advertising revenues, though little benefit is expected near term. 




But financially there are better reasons for the acquisition.  In addition to content, TWX brings lower capital intensity to the business.  Prior, AT&T was spending roughly half of its EBITDA on CapEx.  Now they have added ~9B+ of additional EBITDA with less than 1B of additional CapEx, so going forward we’ll see approx ~55-60B+ of EBITDA and ~22-25B+ of CapEx.  The TWX purchase price of 85B (109B EV) is ~10x (12x) on this EBITDA-CapEx basis, so it seems reasonable for world class assets.  I view the resulting ~30B+ of AT&T EBITDA-CapEx as a floor because they will accordion CapEx upward as EBITDA fluctuates in the mid 50Bs leaving at least 30B/year for debt service, principal repayment, and dividends.  That’s some serious cash gushing through, and they’ll supertanker their way below 2.5x Net Debt/EBITDA in just a few years. 




The DOJ appeal is simply Trump being himself… tenaciously unwilling to give up.  It smells like he’s simply enjoying the chance to bash a major detractor since they now own CNN who covers him constantly in unflattering form.  Note that DOJ has given no point of law for this appeal to address. And they can’t reopen facts since the court has already ruled that vertical integration does not cause price gouging.  Since the acquisition already closed, the worst that can happen is AT&T ends up under some type of Consent Decree where they can’t raise bundled prices without permission for some period of time, and possibly has to divest a unit such as TBS.  The Government’s case continues to be weak, but the media hoopla surrounding this appeal is so outsized, with CNBC devoting all day to it last week, that it is helping create an entry point.




For a look at AT&T Cash Flows, the estimates below were elegantly laid out by Credit Suisse with the stock a dollar higher, at $32.68, so all the multiples now look a tad better, and the multiples on target price they mention are calculated at $29:






6%+ dividend yields don’t last at companies with consistent cash flows and manageable leverage.  And, dividend stocks will make a comeback in any meaningful rotation of sectors, especially when investors move toward safety.




AT&T comps favorably vs Verizon (VZ) and Comcast (CMCSA):




Multiple          T Next 4Q        VZ Next 4Q     CMCSA Next 4Q


P/E                   9.25                 11.21               13.94


P/S                   1.43                 1.63                 1.80


P/B                  1.25                 3.98                 2.29


EV/EBITDA      6.69                 6.91                 7.61


EV/EBIT           11.46               10.68               11.88


Div Yld             6.37                 4.67                 2.29




Overall there is decent upside of 26%+ to an initial interim target of $40 without really growing, which is a 5% dividend yield and a 12 P/E.  This could easily move to high 40s if they can show possibilities for even a low growth trajectory resuming in wireless, which seems well within the realm of possibility given all the new opportunities for snappy marketing.  Also, estimates could prove conservative if they realize merger synergies faster than expected.  Given the sheer sizes involved, this could be meaningful and so far the business units are being treated as stand-alone.




Some of the risks include more capex for the 5G rollout, and or more spending at HBO to compete with NFLX.  The desire to pay down debt also presents a risk they will cheapen HBO’s premium brand by going down market seeking volume.  In addition, new eSIM cards installed in handsets threaten custody of relations with customers vs handset makers and could lead to greater discounting to keep wireless subscribers on the books.






I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.


- Resuming some growth in wireless

- Div Yld compresses a bit

- DOJ appeal concludes

- Reports a few quarters of smooth debt reduction

- Realizes synergies faster than expected

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