AT&T May Trade With A Low Multiple For A Good Reason

Summary

• 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.
• Looking for a helping hand in the market? Members of Reading The Markets get exclusive ideas and guidance to navigate any climate. Get started today »

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.

(Refinitiv Datastream)

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.

(Refinitiv)

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.

(Refinitiv)

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.

(Trade Alert)

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.

Risks

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.

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

[Bunnyfu777]

Would like to comment here from end of june. Looks like the price drop forecast was spot on. Well done my friend.

[Veritas1010]

While I understand fully that $T’s revenues from TimeWarner are but a small part of its projected earnings its dismal entrée is a lesson beyond a warning shot across the bow, management is horrific and cannot execute.

Yes, yes I have been avid supporter and haven’t sold yet. But consider it a public service warnings to others: you simply can’t run your ship this way and stay afloat indefinitely.

[allday1234]

If for some reason you believe that "T" is in failure mode or any mode except one leading to success, I do not see why the many are invested.. Does one believe that the little voices they hear in the middle of the night about the coming failure that they feel the need to warn everyone about a failing business? Do they believe that they need to warn the other investors of that coming calamity ? I suppose it is possible that they want to forewarn all of us ADULT INVESTORS that they have inside information about the forthcoming failure other than a best guess idea because they feel it is their sacred duty. Now I do not know how many are members of the Seeking Alpha board or even read it 2% 10% not very many versus the number of shares outstanding . I guess the real question would be why do you care when the only one who should care is you and your own investments and others that you may be in charge of. If you are concerned it is so easy to remove that concern. I look out for ME, not others. I am smart enough to see beyond tomorrow and maybe beyond the next QTR. I can tell you that if I saw something coming that I did not like I would sell my investment and invest elsewhere, would I tell any maybe--maybe not because it is your investment not mine, your decision, your money and why should you care what I do ?

Allday

[peapaw]

T is doing what T does, very little growth but a consistent dividend with increases every year. It is one of the most popular stocks on SA as so many write about it and so many more comment. With the pandemic this year T has done reasonably well all things considered. Revenue and earnings will be down just about like everyone else, the exception being manufacturers of "designer masks". So here we are once again with many folks upset that T is not what they expect T to be. T is not a growth stock, it is not going to hit $60 a share by the end of the year, it is not going to increase the dividend anything over 4 cents per year. If you're expecting anything else you bought the wrong stock on a dream. T is what it is.

[Kingstocktrader224]

I don’t like that mentality. It’s like accepting defeat before you even buy it. ATT is not a bond, and doesn’t hold up in market declines like a bond.

When I bought AAPL which had a large dividend at the time, I didn’t say gee I hope the stock stays the same or declines over a 20 year period just because I get a nice dividend...Each investor is different tho

[peapaw]

@Kingstocktrader224

It's not a "mentality" issue. It is the reality of T's performance coupled with the many articles and comments written about it. If it came across as and doom and gloom comment that was not my intention. As a long term holder and reading articles over the years I was citing some of the common misconceptions about the stock. If you follow market trends T is very similar to a bond in that when markets are up and stable T is rather unstable with share price generally falling. Generally, when the market is unstable many investors turn to T for protection and share price usually goes up as a general. The exception being the recent Covid-19 shutdown which has decimated the entire market. Only recently is the market starting the return to some sort if normalcy.

[Kingstocktrader224]

Yet ATT is one of the few stock that is not even close to its high pre pandemic

A friend once told me loser stocks stay losing...And winning stocks stay winning...Its why AAPL and AMZN are back above all time highs and T is way down...With other losing stocks...Bottom fishing can work occasionally but that is what T is basically

[jimoc]

I wonder how much being in Texas vs VZ being in N.Y. has to do with all the hate towards T.

[Ta0]

@jimoc
There's no hate. I'm going to add more as soon as I can.

[glssmrbl]

Hmm. I'm betting T falls in price too. 28.9 is hardly a fall. I own shares and would to continue lowering by cost basis. Which has been brought down from 31.89 to 30.79 recently. Let's hope you're right about the options implications.

[Im only here for the gains]

Until people stop watching TV and don’t need their phone service I’m good. Would love a big dip too.

[Donggle]

@Im only here for the growing dividends the pros say its the entertainment streaming that will make or break these guys. Why does anyone need ATT phone service or their TV, nothing special there! No one I know

[Im only here for the gains]

I mean lets be honest... if not VZ or T who else are you getting your TV and phone service from?

[Ta0]

@Im only here for the growing dividends
Mine is provided by Comcast.

[wrayce]

This is a totally insane market. Everything is totally overpriced in terms of likely business outlook. A well covered dividend in the 6-7% range is shelter in a storm. If T goes up in price, fine. I might even sell a little and wait for a pullback to buy it back. If it goes down a bit, fine. I'll buy some more and give myself a raise. -w.

[Kingstocktrader224]

You sound upset that you missed most of the gigantic gains. You could have bought the QQQ when it got crushed and made it all back by now, but instead you are stuck in ATT.

ATT for all the risks trades imo at top high of a price. After earnings miss and bad numbers from overpaid for TWX I see 22-26 as the new fair value.

[jimoc]

wrayce, ebay announced better earnings ahead. COST too. I know all the leftists on cnbc are at it again but you don't have too believe them.

[bdcruzer2]

Leftists...CNBC????

[jvpiter]

Att should be fine. HBO max will do well

[Realist98]

actually Me my wife and daughter just paid $24.99 for scoby doo on PPV...So they're adjusting the business model...Obviously the reason for the hit in earnings is Warner Bros, but I like this, they're adapting.

[Booban]

"Technically, the stock does not look healthy at the moment" I think TA has been totally discredited during this crisis.

[jay0982]

I’ve finally decided to sold all my T stock. Taking that money and reinvest in REIT stock with better return and better dividends. It’s a hard decision but I’m giving up on T.

[Insouciant Investor]

You put it into REITs??? That sector is going to be decimated.

Retail has been dying and is now greatly accelerated. Travel/Leisure is DOA until vaccine. Office space will not recover as most companies now realize they can have employees working from home. Health care sector crushed by covid as nursing homes are a death trap and hospitals shut down all electives.

I wouldn't go near REITs.

[dkrusling]

made six figures in reits in the last three months. REITS are killing it on this rebound

[allday1234]

@jay0982
Well I am sorry to see you go but you must do what you believe is right for your investments....It's your money and in the end that is what it's all about. Unlike others you did not throw stones or bad mouth others who like myself have a different conviction. As you can see there are some that are already indicating that REITS are terrible and so on and so on. Well I have some and O is one of them.. Here is a list of the 10 ten although you probably do not need a list. Of this list I only have "O"

The Top 10 REITs Today
#10: Public Storage (PSA)
#9: W.P. Carey (WPC)
#8: National Retail Properties (NNN)
#7: Realty Income (O)
#6: STAG Industrial (STAG)
#5: Federal Realty Investment Trust (FRT)
#4: Omega Healthcare Investors (OHI)
#3: Ventas REIT (VTR)
#2: Brixmor Property Group (BRX)
#1: Simon Property Group (SPG

Good luck

Allday

[Gary Gambino]

Very Bullish in January at $38.58, Very Bearish in April at $30.80 and in June at $31.51.
Yeah, market conditions change, but once you’ve missed it that much maybe reflect on what you got wrong in the earlier articles and avoid using the “very” ratings.

[GreenPen1]

Good reminders and author can benefit from it.
No one benefits from Monday morning quarterbacking. There is a fine line between being a well reasoned analyst and being something else I won't spell here.

[SPEND your money. Write a WILL]

Don't trust any analysts. Never have, never will.

They are in it for themselves.

Perfect example: GE

[allday1234]

I found out a long time ago that analysts are doing their job to make money and as long there are suckers dumb enough to pay for that advice they will be there to take it. If they are incorrect there are no guarantees, no refunds. Usually no admission no guilt and many will continue to push a failing entity.

Allday

[Atom Atom]

Not a fan of their DEBT. 160B is crazy! 5G will probably be slowed as well. I can't see people buying 1000$ phones when the WORLD is so crazy... I see T as a swing trade.

[SlothfulReunion]

Nah, they'll get their phones for free!

[Insouciant Investor]

Less buying phones = lower churn. So there is also an upside to this.

T makes money on the wireless. Very little comes from selling devices.

[glssmrbl]

@Atom Atom

Oftentimes, carriers subsidize those phones. Think of the buy one get one half off - iphone 11 with Sprint.

[Maverick 2021]

There are events or metrics that can move the T stock price lower. I am sure many people following the T stock know what they are and will pick their spots to go short...haha?
The list of metrics are specific and actionable soon...be smart ?

[boog3]

I bought att after break up in 1980s for about 32 dollars a share. Sold a few years later at 34. Wow.

[Booban]

@boog3 maybe you mean 90's. Google says it was in the 20's during the 80's. Edit: actually, below 20's

[jimoc]

boog3, and that means you watched it go to 60.

[Yield on Cost]

This is easily $100 stock. I would rather own hbo max over Netflix any day plus all the rest of t. No brainer.

[nerd_rage]

Really? Netflix has 183M subscribers and HBO Max has so few that T won't even release the numbers.

By "own" I guess you mean "use" as a customer? Well that's a matter of taste. I've seen the HBO back catalog, so it's not too much use to me now.

I'm thinking in terms of owning part of the company. NFLX is on a rocket ride and T, errr. I don't think they know how to cope with all the disruption.

[Insouciant Investor]

Here comes nerd_rage again. This guy spends all day making posts on a hundred websites instead of doing is job at TwitchTV.

[Yield on Cost]

Netflix business model will end bad. One rev stream only compared to competitors who all have more than one. Others own catalogues. Netflix owns almost nothing.

[zerosum2]

The author should take on a sizable position buying the puts, at $1.10 per contract at strike price $30, wait until the stock fall under $28.90 to make a profit.

[Mark Barca]

What a post...it might go up, it might go down, blah, blah....just stay long T , collect your dividend. We all know it's one of the best 30s stock for long term folks...

[V_uniqueacc]

shh less earnings might mean less divi... a cut? what cut? have you looked at the payout ratio recently?

[allday1234]

You must pay attention. There will not be a dividend cut!
If you believe that being a dividend aristocrat does not men anything you do no know what you are talking about. Their FCF will be enough to sustain the dividend.

Allday

[GreenPen1]

FCF will support the dividend all-night as well.
Sorry about that.
I couldn't resist -;)

[Bingo35]

Who knows what is going on with AT&T? They have made so many poor decisions lately (in past 5 years) that the executives of the company should all be replaced. Unfortunately I have owned T for 40 years and hanging on for the dividend, I am seriously under water.Maybe some White Knight will come along and clean house and put them on the right track but for now their compass is broken.

[allday1234]

A whit knight cannot afford taking them over.
What I do not understand is owning T for 40 years and being under water.
I owned t for e years and sold it 2 years ago at a profit. I bought again 2 years ago and am even. My view is if you are under water you tried to average down and failed. But is your investment and only you will know why.

Yes I am long at 4458 shares

Allday

[jvpiter]

It’s impossible for you to have held for 40 years and not have made a steady positive return

[cdenny]

Long T