AT&T: Bulls Vs. Bears

Summary

• AT&T shares appear to have recovered from most of the uncertainty surrounding the Time Warner merger, which officially closed in June (but remains subject to an appeal case).
• The question is now about the company's growth prospects, and what type of valuation they might warrant. This is one item dividing bulls and bears.
• Another point of debate is the company's debt load, viewed as benign by bulls and troublesome by bears.
• Bulls are excited about the prospects afforded by the TWC takeover and, of course, love the stock's dividend, currently yielding close to 6%.

Written by Nathaniel E. Baker, Seeking Alpha editor and contributor.

AT&T Inc. (NYSE:T) shares appear to have recovered from a Time Warner (TWX)-induced bottom, rallying more than 10% since setting a 52-week low in July. The merger has effectively been finalized, though it could still be unwound on appeal.

With concerns over the merger (mostly) fading, the question now is whether the stock is worth buying at its current price. The Seeking Alpha community remains divided on this matter. A synopsis of six recent articles follows below, split evenly between three bullish arguments and three bearish theses. Read on and have your say in the comments section.

Bulls

1. AT&T is a "strong buy," as the company sports "an attractive dividend yield combined with excellent prospects for future top-line revenue growth," according to David Bradshaw. The market is still discounting the stock with a "very low PE of six," which appears to be due to lingering uncertainty surrounding the merger. These concerns are unfounded as the government's claims that the merger harms competition have no merit, Bradshaw writes: "To me, it makes perfect sense why the government lost the first time around and why the case being under appeal is not concerning to me."
2. The company is in a much stronger market position after purchasing Time Warner, and the sell-off that followed the initial merger announcement has created a substantial buying opportunity, says Victor Dergunov. While the premium paid for TWC was "staggering" and AT&T had to increase its debt load to finance the deal, the result is "untapped potential growth opportunities." AT&T can use its position to expand growth in the HBO segment it acquired by incorporating HBO Now into its data service plans for example. "The influence AT&T now possesses in the video, internet, and wireless connectivity, coupled with its newly acquired content empire, seems unparalleled," Dergunov writes. If AT&T continues to beat EPS estimates by the same 6% average that it has in recent quarters, EPS will be $3.86 next year, implying a ratio of 8.8 times next year's earnings. The stock is also likely to benefit from late economic cycle rotations, as investors move into more defensive, dividend-paying securities.
3. The stock is currently cheap, trading at 9.8 times its blended P/E ratio compared to a 13.4 to 15.3 historical range, writes FAST Graphs Inc. Adding in the dividend means investors could see annualized returns of 24% the next two years. More conservative estimates would still see a 13.82% rate of return. There is a lot of potential upside as well. With the addition of what is now called WarnerMedia, AT&T has tripled its advertisement inventory. It can use its most recent acquisition, AppNexus, to target customers with the most relevant advertisements, leading to an increase in revenue.

Bears

1. The company is heavily indebted and lacking any true catalyst to growth, according to Alpha Gen Capital. Secular trends in the telecoms and cable TV sectors are against AT&T as well, with the shift toward unbundling and skinny broadband continuing to reduce revenue and margin. "If the revenue trend continues, and we think it will not only continue but accelerate, then free cash flow can decline rapidly," Alpha Gen writes. With interest rates continuing to rise, AT&T's interest expenses (20% of the debt is floating rate) will increase as well. The TWC acquisition will not necessarily save the company either, if the DirecTV deal is any gauge.
2. AT&T lacks competitive moats, could see its core business disrupted by new technology, and is no longer seeing rising demand for its core products, writes Charles Lewis Sizemore. The dividend payout ratio may not be as low as it looks either, as the company realized a $20 billion extraordinary tax benefit that will not be repeated. "I'll be blunt: I hate AT&T," Sizemore says, adding that he is referring to the stock and not to the mobile phone or home internet service (both of which he "dumped years ago because they're overpriced," presumably an indication he isn't a fan of them, either).
3. Positive effects of the TWC acquisition, specifically the increase to the bottom line, will take longer than expected to materialize and will not be as much as originally thought, writes David Alton Clark. A long-time bull who recently sold his T shares, Clark is one of few who anticipates hurdles from the government's appeal of the merger decision. "Most pundits I hear talk about it say there's nothing to worry about," he says in his analysis. "I beg to differ." Even if the appeal is denied, the size and scope of the merger makes it "more likely than not it will drop a few balls along the way." Clark has experience on this subject, having in the past been a consultant for AT&T on cost reduction and avoidance measures.

Conclusion

The bull/bear divide on AT&T's prospects appear to mostly come down to how well the company integrates the various Time Warner Cable assets. Bulls are excited about the possibilities. Bears are, well, bearish. The next year or two should see how this plays out.

While high debt levels are never positive, even bears concede the company's free cash flow should more than compensate. Of course, bears would quickly argue that this equation could (or will) change in short order due to a dramatic reduction in revenues or higher interest payments. Where the macro picture is concerned, it's true that this sector of the economy has no shortage of companies that were once seen as scions of stability but have since fallen quite far. "Google (GOOG) (GOOGL) 'Nortel,' a supposedly solid, well-run, blue-chip company," Seeking Alpha user Cleo22 writes in a comment. "So many losses - most thought the impossible would never happen. It did."

In general though, the Seeking Alpha readership appear slightly more bullish, based on an unscientific survey of their comments. "One for the better stocks for Stability, Dividends, Safety In ALL types of Weather Conditions and markets Ups and Downs," writes g.dimit. "This is the new T. Once revenues from ad sells kick into high gear, this will hit $50," says MetaPhysics.

Where do you stand on AT&T? Have your say in the comments below.

Analyst’s 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.

Comments

[RealRural]

Interesting back and forth, can't believe I ate the whole thing, but here I am at the bottom.

Funny, hardly anyone is talking about rising fed rates and how that might impact T's borrowing and interest costs. That should be a big concern I think. ON the fence still as to whether to jump onto the T train, hard to guess if it has left the station or may break down and offer a better price.

Danielaqwe: All the telecoms and cable folks are bandits riding a near-monopoly line, agreed. Still, making investment decisions based on that fact is fraught, though I could not agree with you more on the aggravation of it all.

[danielaqwe]

@RealRural
>>> ...is fraught<<<
You are right, investors should always make decisions based on considerations if they make money or not, but there are many others stocks I can invest in. So I can afford decisions based on principle.

[Ndebttwo]

Real Rural..Putting your $ in a stock always involves risk. I just read an article that said even if the trade wars escalate telecommunication, reits and utilities should fair better than most investments. There are many good stocks from which to pick. I have faith in T and have been a steady investor since 1999.

and am happy.. curious about what decision you make.. best

[Retired and no time for piddly SA]

Nearly all of the Long Term debt is at fixed rates. The only debt that's not is the debt due in the next 2 or so years, I believe. I could be wrong.

[danielaqwe]

I have no position in ATT.
There are a few business practices of ATT which I find seriously counterproductive.
Every year or two I must switch my cable TV plan. Only options in my area are Comcast and ATT. The basic plan is around $100-$120 for cable and internet.
Both companies, when the contract expires, jack up the cost by %50. This is seriously bad business for them, because I simply go to the internet and switch to the other company... no hassle for me. All is needed to change a connection which is located in a box behind the garage. Then bring their modem and router to the next UPS store, which takes 10 minutes.
They just lost $1000 in pure profits, because once the investments in infrastructure have been made... it is all profit.
For this reason alone, I would NEVER buy ATT shares.

[Technosemi]

After all the hoopla about AT&T First Responder Network, not ONE person has talked about this article that came out today. Now, there will be a slowdown in the expected number of cell-towers AT&T planned to have. Think that will help the fragile 33 to 34 share price this pig just sits in?

1:39 ET - Instinet sees a slower roll-out of cell-tower upgrades from a big CommScope customer, AT&T, providing less of a tailwind for the company heading into 2019. The investment bank now sees ATT installing CommScope hardware on 15,000 cell towers in March instead of the original estimate of September 2018. The installation is part of a government-mandated project to create the First Responder Network--a high-speed, broadband system dedicated to public safety. The revised outlook prompts Instinet to cut CommScope to neutral and trim its price target to $31 from $35. Shares are off 4.6% at $28.09. CommScope had a one-day 27% plunge back in May when it warned about 2Q earnings and cut its yearly outlook. The stock has bounced between $26-$33 since. ([e-mail])

[snowbrdr1220]

”We’re at the dawn of something new that will define the next decade and generation of connectivity,” says Andre Fuetsch, CTO of AT&T Communications, in a statement. “Future smart factories and retailers, self-driving cars, untethered virtual and augmented realities, and other yet to be discovered experiences will grow up on tomorrow’s 5G networks. Much like 4G introduced the world to the gig economy, mobile 5G will jumpstart the next wave of unforeseen innovation.”

[Kjellin]

Technosemi, even though it is a delayed roll-out, hopefully it's only deferred profit for T. CommScope depends upon the timing more than T--at this point, CommScope being the vendor in this circumstance.

It's also a deferred expenditure for T. Again hopefully, it all balances out in the long run.

[Technosemi]

@Kjellin ,

Hope you're right. But this First Responder Network has been so touted and AT&T releases on sometimes a daily basis how many more cities have been added.....though it doesn't seems to do squat for the stock price.

I'm sure the little bump up to go over $34 was due to those buying to get the dividend. Although it is also interesting that it closed today on a weekly option expiration at $39.99, so Puts got assigned, but Calls didn't. How clever these algos are that they can accomplish this kind of filth.

[Stickgs]

What affect/effect will the coming 5G rollout have on AT&T?

[snowbrdr1220]

Increased data usage and organic growth due to faster speeds, IoT, and Project Air Gig delivering reliable high speed internet to rural america.

[Greg Merrithew]

I have been long T for a number of years now. As a DGI style investor, an Aristocrat company paying a 6% dividend is very compelling. Every time T hit $34 I topped up until I obtained a full position (5% of portfolio). M* valuation recently dropped from $40 to $37 for T in the near future. I believe this is a conservative estimate. I do expect T to continue holding to a penny increase per year to the div for at least the next couple of years until the debt servicing settles down. That of course is interest rate sensitive in a rising interest rate environment. As a DGI, I will be holding this company for at least the next ten years, By then, my dividend YOC should be over 7%. Not bad for SWAN investment.

[fred.bear]

Thanks for the balanced article. This report is very informative and helpful. Long T!

[Trevon Trent]

I think that AT&T should not own Time Warner because of Turner, I’m a huge fan of Cartoon Network and I don’t have AT&T and AT&T becoming the ultimate parent company of Turner is just bad news because they could effect Turner in many of ways. I’ll be fine if they lose the appeal and just gave up Turner like planned and I pray for that to happen on February 28th, 2019. Turner can be its own entity like before, no reason for AT&T to have Turner just for advertisement use and use it against other providers.

[Kjellin]

TT, AT&T needs Time Warner to stay competitive, long-term, with both Verizon and Comcast, if not others. T has to have content or it will be relegated to cell phone/telecommunication services--and little else, in the future. It would make money for years, and then it would wither on its "lines" if not vine.

It might end up as the buggy-whip maker of this century, without TWX.

[billtaylor522]

I have been increasing my position rapidly and T now makes up 33% of my portfolio. I guess you can say I’m a believer. Great dividend income too

[CanadaGoose0123]

I thought mine was high at 13% of portfolio.

[billtaylor522]

I was at 12% of portfolio about 3 months ago. I am looking to retire in about 5 years and believe T is a safer alternative than other more volatile investments in tech for example. Though I do have a portion in small-mid cap tech. Late businees cycle rotation into dividend stocks should help prop up T's price in event of market downturn. Plenty of cash flow to cover dividend helps me sleep well. I recently sold Ford (F) despite the 5% dividend and glad I did. I have also held Altria (MO) for several years, and am now looking for an exit point despite that nice dividend.
Bears question T's debt load and strategic plan. To me, T has a long track record of solid execution and good mgmt team in place. That adds up to higher probability of sucess than failure.

[AlieGee]

33% is high in any portfolio.....Diversification is the way to wealth...

[cdenny]

Scientifically speaking - long T

Also, how long should I hold my Worldcom?

[MetaPhysics]

@cdenny

Buy and Hold would say 'never sell'.

I myself, say, as long as you are happy with the dividend, hold until the P/E gets to 18 or so, and then sell.

The really funny thing is that WorldCom still lives on in Verizon.

[Kjellin]

About as long as your Anaconda Copper Stock, ha.

Long T, and justice, i.e. merger opposition ends.

[MetaPhysics]

@SA Bulls & Bears

Thanks for the shout out. T is my largest holding at 17% of my portfolio. Cost basis of 32.62.

@Technosemi
$65.00 for your first purchase? That was the tech boom if T made it that high. As a 20 year holder, I can see why you might be a bit frustrated. Heck the highest I see is 31 May 2009 at $58.00. I suppose interday could have hit $65.00?

[Technosemi]

@MetaPhysics

No, I was wrong, thinking of another stock.

I paid up to $45. I sold at a huge loss in the high $30's. Then I bought it back. I'm glad you asked, because I need to have my brokerage's Cost Basis try to calculate the total loss, which is tremendous.

NEVER in the years I've traded have I ever, no matter what foolish mistakes I made, have ever come anywhere close to the losses in AT&T.

That I have owned shares since the beginning of 2017, and have seen nothing but a stock on a downhill path.

Only a totally-screwed up company like this would be on a downhill slope for nearly 2 years. No expecting it to continue downwards, I diluted shares, but this only led to more losses, as share count continued to snowball, and there were NO opportunities to get out without huge losses.

This stock has been a SHORT for nearly 2 years.

That's why I find it beyond the absurd to read daily postings on how great the stock is, how great the dividend is. Most of these pumper posters bought this stock in past years, admitting they paid a fraction of the prices in the last two years, or they bought it recently, and, if the stock doesn't go lower, they won't lose money.

These posters provide nothing of any value to those who bought in the high 30's to 45. All they do is rave about the dividend. The dividend has been like p*ssing in the ocean to all the losses I have suffered from what I consider one of the worst large-cap stocks one could be invested in, thanks to the idiot at charge, Randall Stephenson.

[Ndebttwo]

Technosemi.. I have T in three separate accounts going back to 1999. I have been quite happy. Sure, the price has fluctuated wildly and we are now at lows that are beautiful. All my T stocks are in drips. AND I continue to buy as I can afford to.

Management can be voted out. I am very long T. If you have faith in T long term I think you buy aggressively at the current price.

[fun2roc]

TECH, I understand your frustration. You just bought at the wrong time, and you sold at a loss, which made things feel even worse. I've made my share of mistakes too, though AT&T doesn't seem to be one of them. I have been buying T hand-over-fist below $34, and plan to Hold for the next two years at least. Let's just wait to see what the future brings. If the DOJ issue gets laid to rest, the stock will get a bump higher, and if next years Earnings & Revenue numbers improve, well that will push it up even higher. Yes, I do love that Dividend, but the potential Upside over the next couple of years is probably still $10 a Share. A 30% increase in price would be so sweet!

[rpwhitehill]

Long T for several years. In general, don't understand this market at all: seems bipolar with its undervaluation of many solid income stocks as well as mlps and the overvaluation of others, eg Tesla, Amazon, Facebook maybe Alphabet. Actually extreme divergent. Answers anyone?

[gary 15]

Everyone is looking for the next tech stock that will make them a Millionaire. You know, I invested $5000 in this xxx stock 10 years and today it is worth $XXXX.

[Nathaniel Baker]

that stage of the cycle then? Sounds like 1999 all over again

[snowbrdr1220]

@Nathaniel E. Baker How many comments in 1999 said they were selling 30 - 70% of their portfolio to raise cash, so they can capitalize on the coming market crash. The sidelines are awash with cash right now, and all kinds of retail commentators in all of the financial forums I read claim to be raising more of it. This bull could continue to run for many years yet.

[Buyandhold 2012]

I have been an AT&T shareholder for so long that it would be a nightmare to try to figure out my cost basis.

I began investing in AT&T before it was split up into the Baby Bells.

Then the Baby Bells either merged or had spinoffs.

Oh vey!

Investing in AT&T led to my owning so many other stocks through break ups and mergers and spinoffs.

At any rate, I am happy with the 6% dividend. And the trailing P/E, forward P/E, 5 year expected PEG ratio and price to book all look good.

[AlieGee]

Oye vey - - Close...........

[DS68]

Alie....closer still....oy vey

[AlieGee]

@DS68 - - Yup - - you are correct !

[nerd_rage]

AT&T now has some strong brands: HBO and Game of Thrones. These can be mismanaged, however.

[vinyl1]

The obvious thing to do is to use the huge cash flow to pay down debt as rapidly as possible. They have $300 billion in debt, but nearly $40 billion a year in operational cash flow. Even after dividends and capex, they should still be able to pay down substantial amounts of debt and strengthen their balance sheet.

[Young-Gun]

You write,

"AT&T lacks competitive moats...",

as if anyone can afford the required infrastructure and obtain licenses to operate one of--if not the largest--telecommunication networks in the world.

Long T

[golfer4ever]

Technosemi - you could not have said it any better. Scary how some people do math these days.

[Technosemi]

@golfer4ever ,

Thanks for the compliment. At least people are starting to see that the real situation this company has placed itself in is far from the winner they try to make it out to be.

[Bruce Bohannon]

I love reading a good Bear Case on a Business. T trades X Div Tuesday - I may get called out Early and am glad Mr Market is driving Price Down today! I'm happy to receive my next Divi or get called. Not a Bull or a Bear. Like the shares I picked up a few months ago at a multi year low which are mostly gone now.

[Jimmy Grisham]

Nathaniel E Baker,

Your article thoroughly confuses TWX and TWC. AT&T did not buy Time Warner Cable. Time Warner Cable was spun off by Time Warner (TWX) and later purchased by Comcast. Comcast still owns Time Warner Cable. Time Warner (TWX) the remaining parent company was purchased by AT&T. Time Warner used to complain all the time about people getting them confused.

I am long T as a result of the buyout of TWX. Ex-employee of TWX

[CanadaGoose0123]

Time Warner Cable was acquired by Charter not Comcast. I would know, I'm one of the suffering customers although the service outages have been better lately.

[Jimmy Grisham]

CG, Yes, you are correct. Thank you for the correction. Appears my memory wasn't so good and I should have verified. Time Warner Cable had a terrible reputation for its service. None of the divisions within TWX ( Cable, AOL, Warner Bros) could get along and work together. All under the pathetic leadership of Richard Parsons, and with the distraction of that idiot Ted Turner on the board. It was a three ring circus for sure.. Best wishes!

[Kjellin]

Mr. Grisham, "that idiot," Ted Turner only created TBS, TNT, CNN. and TCM, and is probably the greatest television visionary in the last quarter of the 20th century. He won the America's Cup. Would that my idiocy, and yours, too, was as wide-ranging, successful, and positive as his.

Long T, and Ted Turner, too.

[dharp98]

Great posts from everyone - good to see a nice heated debate. I have been competing against ATT for 40 years and they still remain the 50 pound gorilla. We have not even imagined all of the possibilities with 5G and IOT. I am nearing retirement and continue to grow my position. In terms of integration - not sure I know of anyone that does it really well. I really appreciate both sides of the argument.

[Technosemi]

@SA Bulls & Bears ,

You state that you based Bulls vs. Bears on six T articles, 3 Bull, 3 Bear. I have followed every article on T, and I disagree with your statement that there are slightly more bulls than bears.

Just look at the responses to your own article. Almost entirely bulls. Every T article is jam packed with vehement defenses and claims about how great an investment T is. Many of the comments provide NOTHING that supports that claim - not comments like, "Go T", "Long T forever", & the endless obsession over a 0.50 dividend, where the stock has gone down during the time I began buying it from $65, and is now in the $33's. Common sense & simple mathematics tell you that the amount of the dividend, over a period of, say two years, would yield huge losses with the dividend factored in. But these bulls don't get it, and you can't reason with them, as you get viciously attacked or ignored.

I believe you should have taken more than six hand-picked articles to arrive at a true picture of sentiment, which would have clearly showed you that the Bulls consist of 90% of the posters.

Even with your Bulls vs. Bears arguments, I don't find the Bulls arguments convincing in the least. I will quote (w/ellipses to shorten) your Bears argument, which I think supports itself leagues above the Bulls argument you present.
___________________________________

"The company is heavily indebted and lacking any true catalyst to growth... Secular trends in the telecoms and cable TV sectors are against AT&T as well, with the shift toward unbundling and skinny broadband continuing to reduce revenue and margin. "If the revenue trend continues, and we think it will not only continue but accelerate, then free cash flow can decline rapidly," Alpha Gen writes. With interest rates continuing to rise, AT&T's interest expenses (20% of the debt is floating rate) will increase as well. The TWC acquisition will not necessarily save the company either, if the DirecTV deal is any gauge.

AT&T lacks competitive moats, could see its core business disrupted by new technology, and is no longer seeing rising demand for its core products, writes Charles Lewis Sizemore. The dividend payout ratio may not be as low as it looks either, as the company realized a $20 billion extraordinary tax benefit that will not be repeated. "I'll be blunt: I hate AT&T," Sizemore says, adding that he is referring to the stock......

Positive effects of the TWC acquisition, specifically the increase to the bottom line, will take longer than expected to materialize and will not be as much as originally thought, writes David Alton Clark. A long-time bull who recently sold his T shares, Clark is one of few who anticipates hurdles from the government's appeal of the merger decision. "Most pundits I hear talk about it say there's nothing to worry about," he says in his analysis. "I beg to differ." Even if the appeal is denied, the size and scope of the merger makes it "more likely than not it will drop a few balls along the way." Clark has experience on this subject, having in the past been a consultant for AT&T on cost reduction and avoidance measures.

.... bears would quickly argue that this equation could (or will) change in short order due to a dramatic reduction in revenues or higher interest payments. Where the macro picture is concerned, it's true that this sector of the economy has no shortage of companies that were once seen as scions of stability but have since fallen quite far... "Seeking Alpha user Cleo22 writes in a comment. "So many losses - most thought the impossible would never happen. It did."
___________________

I think the above says it ALL.

[TechTide]

@Technosemi

That a way! Hit em with the good old slap of reality. I started buying in at $36, and was able to get a chunk around $30, and now this stock has hit a wall at below $34. I believe their wireless service coverage is not competitive enough with VZ, and they don't seem to realize that great media is useless if you can't rely on the service...

[Nathaniel Baker]

"slightly" more bulls might have been a slightly obtuse way of hedging the fact that it wasn't a scientific survey. Might have been.

[Technosemi]

@TechTide,

Thanks! I don't know about their wireless service, but I have heard the same. And, as far as their media - it is useless not only if you can't rely on their service (which I've experienced for years with their Uverse), but you can't rely on the 85B they squandered on TWX to bring much to the table in increases in revenues, as the whopping debt swallows the minor revenue increases it is getting.