3 Reasons Why We're Bullish On AT&T

| About: AT&T Inc. (T)

Summary

AT&T has beaten the S&P 500 in 2016 and we think there is more outperformance to come.

We believe that its investment in customer service will bring improved margins, while its international growth opportunities will also positively catalyse earnings.

AT&T’s improved efficiencies will also boost its bottom line and share price moving forward in our view.

Since the start of the year, AT&T (NYSE: T) has risen by an impressive 25%. This easily beats the S&P 500's gains of 6% over the same time period. While some investors may feel that AT&T is now due a pullback and profit taking may become commonplace, we think that its shares will continue to rise and beat the S&P 500. Here are three positive catalysts which we believe will boost AT&T's financial performance and share price moving forward.

Efficiencies

In our view a key catalyst on AT&T's earnings and share price moving forward will be increasing cost savings and efficiencies. The company is in the process of transforming its network from hardware to software-centric. On completion of this, AT&T will be able to deliver the most network traffic at the lowest marginal cost in the industry, which we believe will boost its bottom line.

Further, AT&T is also adapting the structure of its business to make it more streamlined. For example, it is improving the efficiency of its supply chain, automating customer self-service, making an increasing number of interactions digital to reduce staff time spent on common issues, while also simplifying its pricing and offers for customers. And with AT&T also utilizing its scale following the acquisition of DIRECTV to generate the lowest video content costs in the industry, we think that the company's lower cost base and improving efficiencies will provide it with a competitive advantage over rivals and positively catalyse its earnings and share price moving forward.

International opportunities

AT&T's wireless operations in Mexico could also boost its financial performance and share price moving forward. In terms of Mexico, AT&T has a competitive advantage over its peers in our view due to its ability to offer plans that allow customers to use their mobile device in the US and Canada in a seamless fashion. This is possible because of AT&T's ability to provide fast and secure mobile LTE connectivity across all three countries.

Further, AT&T's LTE network is expected to cover 75 million people in Mexico by the end of the calendar year. And while the outlook for the wider Latin American economy is uncertain, Mexico's growing middle class, investment-friendly regulatory environment and underserved smartphone market presents a major growth opportunity for AT&T in our view. In fact, the Mexican economy is forecast to grow by 5.9% per annum between now and 2020. As such, its exposure to Mexico could positively catalyse the company's profit and share price moving forward.

Customer loyalty

AT&T's renewed focus on improving the customer experience could boost its sales, profit and share price moving forward. That's because a better customer experience could improve customer loyalty and provide AT&T with a greater proportion of long term, repeat revenue as well as cross-selling opportunities and higher margins.

For example, AT&T is investing heavily in a program where it seeks to make all customer interaction effortless. Whether that's regarding interactions with customer services or searching for a specific product, AT&T is seeking to gain a competitive advantage over its rivals by investing capital and time in delivering superior customer service. It is also providing innovative staff training to ensure that its employees are able to pivot their skills from hardware to software, as well as deliver on potential cross-selling opportunities. In our view, the potential for improved customer loyalty resulting from AT&T's investment in customer service is significant and it could improve margins, thereby boosting profitability and AT&T's share price moving forward.

Looking ahead

Clearly, AT&T is not without risk. Its acquisition of DIRECTV has the potential to cause near term challenges in terms of integration, while there is a danger that the expected synergies from the deal will not be delivered. However, with AT&T being on-track to deliver $2.5 billion in annual synergies by the end of 2018, we remain comfortable with the integration process.

Further, the deal has caused AT&T's debt levels to increase to a higher level than their historic norm. The company currently has a debt to equity ratio of 105%, but in our view this is not a major risk. That's because AT&T has strong cash flow and intends to use all free cash flow following dividend payments to pay down debt over the next three years , at the end of which it expects debt levels to have returned to their historic norm.

As such, we're bullish about AT&T and believe that its international growth opportunities, the potential for increased customer loyalty resulting from investment in customer service, as well as its improving efficiencies and cost savings will positively catalyse the company's earnings and share price moving forward.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.