AT&T: Yeah You Might Wanna Buckle Up For This

| About: AT&T Inc. (T)


One of my key holdings is AT&T and my central thesis has been that the company has transformed itseld to be one of the most innovative company's in modern history.

A new streaming service with skinny bundles has been launched that will have trickle down impacts for AAPL, AMZN and GOOG devices.

What will the impacts to revenues be?

One of my key holdings is AT&T (NYSE:T), and I let the stock come down without selling any of it. Truthfully I was too preoccupied the last month to micromanage trades, but the reality is that this is to be one of my longest-term holdings. Sure I left some on the table. But I am letting it ride and reinvesting the dividends along the way. When the stock comes down, yield goes up. Simple as that. Of course, the decline was a big buying opportunity. Now, AT&T is a name which I have discussed in many articles. Overall, the share price had been very stable, it was reliable for income, but growth kicked in and shares have spiked in 2016. That was until the proposed deal with Time Warner, which has sent shares down close to 20%. It was an opportunity to add to holdings. Thank you. I am in this name not for growth but the incredible strength of the company's growing dividend payments over time. Still, with all of the action in the name the company really is the new AT&T.

What do I mean by the new AT&T? I am talking about innovation. Now I have covered the path to innovation over the course of many articles as I have developed the thesis. I don't want to rehash the entire course of my research here, but suffice it to say that the company has quite simply fundamentally changed in the last five years. For AT&T this much innovation in such a short period of time has been unprecedented. There are a number of purchases the company has made, as well as experiments like its new foray into the Hello Lab project. But perhaps the best move that bodes well for growth is the company's push to integrate its DirecTV content with mobile. I would be remiss if I didn't also at least mention that the company working to be first on 5g technology, in addition to pumping hundreds of millions of dollars into its infrastructure. All of this has led to my hypothesis that the company is shifting to be a global telecommunications and media company, rather than just a simple 'phone' company. And that takes me to today, where we learned that the company in short order has completed another company purchase.

And now, we just learned of a massive move by the company to secure customers. Launching tomorrow will be the new DirecTV Now service, the latest in the company's line of innovative and competitive moves to truly become a 21st century telecom. What is it? Well these are new streaming packages that offer sleek content that is geared toward mobile users who want content. Then again, the packages in my opinion are pretty broad and cost effective.

The packages being offered start at $35 a month for the "Live a Little" option. This option comes with 60+ channels. If you would like to add more content, there is the "Just Right" package for $50 a month, or the "Go Big" package for $60 a month, both of which offer 80+ channels. I see these as being the most popular choices. Then, if you want it all, there is the "Gotta Have It" option, for $70 a month, it comes with 120+ channels. This move is a direct threat to existing Dish services and cable providers, and really will take smartphones to the next level of entertainment. I will add, the premium content such as Cinemax and HBO are also available at the paltry price of just $5.

Now, the question is, how do you get it? Well first you have to be a customer of AT&T and then sign on for the new service. The service will be available on Apple (NASDAQ:AAPL) devices including the iPhone, iPad and Apple TV, Googles (NASDAQ:GOOG) (NASDAQ:GOOGL) Android devices and tablets, as well as on Amazon (NASDAQ:AMZN) Fire and Fire stick. In addition it will be compatible with Microsoft's (NASDAQ:MSFT) Internet Explorer, as well as Chrome and Safari, as well as a few additional platforms. A number of promotions are ongoing with Apple and Amazon to obtain the service with certain packages. This is a game-changer.

Here is the is problem. I don't have estimates for what this will mean for revenues or earnings at this time. In order to support the share price growth (even in light of the recent decline) we have to look at the performance of the company. Coming into 2016, AT&T has had a history of so-so quarters, but the quarters have also rarely been poor or rarely been astounding. But with a string of recent strong moves for the future, a growing wireless network bringing in new customers with its strong LTE signal and a 4G LTE network, and its TV/high-speed Internet service deals, investors have higher expectations than, say, a year ago.

I think it is absolutely fair to say that the company sees a boost in revenues. I for one am personally considering a switch to the company now. I'm kind of over paying a massive bill to a competitor and paying separately for a major cable provider. In terms of recent revenues, the starting point can be taken from the just reported Q3, although to be fair, Q4 is when the service launches and Q1 2017 will be the first full quarter of when this service is available. Let us discuss however Q3 to understand where we begin. Revenues in Q3 missed analyst estimates slightly. They came in at $40.89 billion. But it's just a headline number and doesn't tell us much, so we have to dig deeper. It's notable that these revenues are up 4.6% year-over-year. That's strong for a telecom giant of this size. Compared with Q3 2015, operating expenses were $34.5 billion versus $33.2 billion. This year-over-year rise does not surprise me considering the number of moves made in the past year on AT&T's path to innovation. I was very pleased that operating income rose to $6.4 billion versus $5.9 billion last year. But if we adjust for merger expenses, operating income was $8.3 billion versus $7.9 billion, while operating income margin was 20.3%, the same as a year ago. That's a win in my book.

Taking into account revenues and expenses, net income was $3.3 billion, or $0.54 per share, compared to $3.0 billion, or $0.590 per diluted share in the year-ago quarter. But it's a GAAP number and doesn't tell us much. Thus, an adjusted number is more appropriate. If we adjust for $0.20 of costs primarily for merger and integration-related items earnings per share was $0.74 compared to an adjusted $0.74 in the year-ago quarter, showing no increase. This was in line with analyst estimates, but missed my estimates by a penny. There was strong cash flow of $11 billion in operational cash, up 1.8% and $5.2 billion in free cash flow after capital expenditures, down 6.5%.

Now, in light of this new service being launched I have to tell you that when AT&T reported its Q3, it did not alter its guidance, but is on track to be met or exceeded. I am banking on the latter with this new service as a catalyst. At my last check the company sees double-digit revenue growth, with adjusted earnings growing in the mid- to high-single digits. We should see strong margins and a 70% payout ratio for the dividend. Recall, the dividend has been raised again now for 2017 by another penny. AT&T continues to be a serial dividend raiser, and it is my hope to see a $0.50 quarterly dividend by the end of 2017, with revenues and cash flow being bolstered by this service launching tomorrow. These are exciting times indeed.

Note from the author: Christopher F. Davis has been a leading contributor with Seeking Alpha since early 2012. If you like his material and want to see more, scroll to the top of the article and hit "follow." He also writes a lot of "breaking" articles that are time sensitive. If you would like to be among the first to be updated, be sure to check the box for "Real-time alerts on this author" under "Follow."

Disclosure: I am/we are long T.

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.