- AT&T is expected to see a sharp decline in revenue and earnings.
- The rebound is forecast to be very slow.
- It is one reason why traders are betting shares fall.
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AT&T (NYSE:T) has struggled to keep pace with the broader market, and based on how the stock is currently positioned, it may continue to do so. It appears the outlook for the company is not strong, as analysts cut their earnings, revenue, and free cash flow estimates for the next three years.
Based on those estimates, the company is likely to struggle to return to 2019 levels of revenue and earnings before the end of 2022. The stock doesn't trade with a high PE ratio, which makes it attractive. However, that isn't to say that the multiple can't contract further, or the stock is a bargain. Sometimes, stocks trade with low multiples for a reason.
Bets are being placed in the options market that the stock does fall by the middle of July. Additionally, the technical chart is weak, indicating the stock has downside risk. You can see all of the previous articles I have written on this Google Spreadsheet I have made available.
Bargain or Not?
The stock currently trades for just 9.5 times one-year forward earnings estimates. That is at the very low end of its historical range since the year 2000. Over that period, the stock has only traded with a PE equal to or lower three other times.
More importantly, analysts are continuing to cut estimates for AT&T. The company managed to earn $3.57 per share in 2019, and analysts now see the company's earnings slumping in 2020 by almost 10% to $3.21 per share. Even worse, earnings may increase to just $3.49 by the year 2022.
Revenue estimates have dropped sharply as well and are forecast to fall to by almost 6% to $170.7 billion from $181.2 billion in 2019. Additionally, estimates show revenue will climb back to $173.0 billion in 2022.
The revenue reduction will impact free cash flow, which is expected to fall by almost 18% to $24.0 billion in 2020 from $29.2 billion in 2019, and only expected to return to $26.4 billion in the year 2022.
It all comes together to suggest that perhaps AT&T is trading at low valuation because it deserves to. The company has very little if any growth, with only an attractive dividend yield. But even that seems problematic with falling free cash flow and about $15 billion to pay out in total dividends. Sure, the company has enough cash flow to cover the dividend, but it also means it will have less cash to pay down its debt, which is around $160 billion.
Betting on A Decline
It could be why traders are betting the stock falls from its current price. On June 3, the open interest for July 17, $30 puts increased by roughly 36,000 contracts. The puts were traded on the ASK and were bought for approximately $1.10 per contract. It implies that the stock will fall to around to $28.90 by the middle of July, a decline of about 8.3% from its price of roughly $31.50 on June 3.
Weak Technical Chart
Technically, the stock does not look healthy at the moment, having failed to break out and rise above resistance at a price around $31.80. Should the stock be unable to advance beyond $31.80, then it seems likely that shares could return to as low as $28.90.
However, should the stock be able to break out, it could go on to rise to around $34.25. It is possible that if the stock market continues to rise as investors bet on a smooth economic recovery, the stock could just be carried higher, if by nothing else more than market forces. It makes betting against stock in this environment very tricky.
It seems, if any stock is due to move lower, AT&T might fit that profile.
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This article was written by
I am Michael Kramer, the founder of Mott Capital Management and creator of Reading The Markets, an SA Marketplace service. I focus on long-only macro themes and trends, look for long-term thematic growth investments, and use options data to find unusual activity.
I use my over 25 years of experience as a buy-side trader, analyst, and portfolio manager, to explain the twists and turns of the stock market and where it may be heading next. Additionally, I use data from top vendors to formulate my analysis, including sell-side analyst estimates and research, newsfeeds, in-depth options data, and gamma levels.
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.
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