Growth All Around As AT&T Gets Ready To Release Second Quarter Results

Jul. 8.14 | About: AT&T Inc. (T)

Summary

Q2 earnings later in the month will beat analyst expectations because of solid subscriber momentum.

T’s healthy dividend yield is well supported by strong balance sheet and hefty cash flows.

Increased demand for data will continue to drive growth in the future.

AT&T, Inc. (NYSE:T) is one of the largest telecommunication companies in the U.S. It offers local and long distance voice, wireless, data and video services. I am bullish on the company because of the strong subscriber growth expected in the second quarter. Also, subscriber momentum is expected to continue in upcoming quarters due to its competitive pricing. Furthermore, it continues to invest in its network, to provide quality services. Lastly, T offers an excellent total return opportunity of 9.70%.

Strong Expected Results for Second Quarter

In the meeting with Street analysts, the company shared some interesting insights for the second quarter. First of all, the company has discussed that some solid subscriber growth is expected in the recent last quarter. Postpaid net ads are expected to cross 800,000 in the quarter, with a churn rate of 0.95% or lower. This performance was primarily attributed to lower competitive pricing for Next subscribers and cutting down prices for 9 million non-Next customers. The prepaid subscriber base is expected to decline in 2Q, but the management has hinted towards a best-in-class pricing strategy for cricket customers, which could help improve subscriber trends.

This move clearly shows that the company is targeting to strengthen its subscriber base in a competitive environment, and it is not pursuing a defensive strategy. Rather, it's T that is calling for a price war.

Next continues to drive growth for the company. It is expected that T will sell 3.2 million Next smartphones in 2Q, which is nearly 50% of total smartphone sales. This is good for the company because these subscribers have a low churn rate and smartphones are completely un-subsidized. Furthermore, T makes these plans available to existing customers, which have lower credit risk. Re-selling used phones (customers exchange their old phones for new ones) is not a concern for T because it operates with GSM technology, which makes it easier to sell phones to the rest of the world. Also, the majority of handsets are iPhones, which hold more value than android phones.

The strong growth momentum has helped the company increase its full year revenue guidance to 5% from 4%. It also re-affirmed its guidance for strong stable margins and EPS growth in single-middle digits.

Growth in data usage

Increased demand for data will continue to drive growth in the future. Increased usage of connected devices like smart phones and tablets will also increase the demand for data buckets offered by wireless companies, and hence their revenues. In the recent annual survey, CTIA shows that monthly wireless data has increased by 120% in 2013 and reached 269.1b mega bytes.

The rise in data may help companies increase their revenues, but it also results in pressuring company's networks. So, T is heavily investing in its network. Its 4G LTE framework is expected to be complete by the end of 2014. Furthermore, the company is expected to extend its IP network to nearly 57 million customer locations and its fiber to 1 million business locations by the end of next year. Therefore, the company can also expect growth in data revenues because of better network performance.

The management is keen to increase its spectrum to provide superior service and T is expected to participate in both AWS and broadcast spectrum auction. The management also believes that there are few opportunities for spectrum acquisition available in private markets. So the focus is on these two government auctions, which are expected to be completed in 2015.

Valuation and Dividends

I have used a discounted free cash flow analysis to determine the company's target price. I have discounted free cash flows using a WACC of 6.5%. I have also used a terminal growth rate to be 1%. Also I have used total debt and shares outstanding numbers from the annual report of 2013. All the numbers used below are in millions.

Currently, the stock is trading at $35.84, and based on my price target, I am expecting a rise of nearly 4.50%. Furthermore, the company continues to offer an attractive yield of 5.2% to entice risk-averse income-seekers and retirement accounts. The company has a strong business model, hefty free cash flows and a long history of rising dividends. Also, T has repurchased $1.2 billion worth of shares in 1Q14 in the form of a share repurchase program.

2015

2016

2017

Terminal Value of FCF

Estimated Free Cash Flow

$13,445

$14,225

$15,315

$281,239

Discount Factor

0.939

0.8817

0.8278

0.8278

Present Value

$12,625

$12,542

$12,678

$232,810

Click to enlarge

Total Value to firm = 12,625+12,542+12678+232810=$270,655 million

Total Debt= $74,788 million

Total Value to firm - Total Debt = Total Equity value

$270,655 - $74,788= $195,867 million

Share Outstanding = 5,226 million

Target Price = Total Equity Value/Share Outstanding

$37.47 = $195,867/5,226

Final Words

Many people argue that the industry dynamics are changing. New technology and innovation will damage the company's revenue growth. I belief T has managed to successfully adapt to the wireless business in the past and if there is something new coming up, the company will adapt to it again. The company is expected to release its 2Q earnings later in the month, which I believe will beat analyst expectations because of solid subscriber momentum. Also, T's healthy dividend yield is well supported by its strong balance sheet and hefty cash flows.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.