AT&T's Stock May Find A Long-Term Path Higher After Results

Apr. 16, 2021 1:45 PM ETAT&T Inc. (T)209 Comments

Summary

  • Shares of AT&T have struggled dramatically over the past year.
  • Expectations are very low for the company when they report quarterly results next week.
  • This could give the company a chance to finally turn those low expectations around.
  • Looking for a helping hand in the market? Members of Reading The Markets get exclusive ideas and guidance to navigate any climate. Learn More »

AT&T Advises Its Over 200,000 Workforce To Work From Home, As Coronavirus Continues To Spread
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Perhaps AT&T's (NYSE:T) time to shine is about to return. The company is expected to report results on April 22 before the opening of the trading session. It's not expected to be a strong quarter for the company, with earnings expected to have slumped by nearly 7.4% to $0.78 per share, vs. the same period a year ago. Meanwhile, revenue is expected to drop by around 90 bps to $42.4 billion.

Even the Entertainment unit is expected to have declined in the first quarter, dropping by 5.9% to $9.9 billion. Certainly, not the direction one would have hoped for, given the promise of HBOMax. Still, despite the gloomy outlook, traders are betting that AT&T's stock rises and pushes higher following these results, suggesting that expectations may be too low.

The Bar Is Set Very Low

Analysts have been steadily lowering their earnings estimates for 2023 and now see no earnings growth for the company for the next three years. It leaves the stock trading for 9.4 times one-year forward earnings estimates, which is lower than its historical average of 10.7 over the past five years.

Revenue growth for AT&T is expected to be non-existent for the company over the next three years too. Revenue is expected to stay around $172 billion over that time. That's down dramatically from analyst forecasts that at one time stood at nearly $190 billion. It really helps explain why the stock has been in such a downward spiral the last few years.

Even the low rate environment hasn't been able to help AT&T. The stock currently has a dividend yield of about 7% vs. a two-year Treasury rate of 16 bps. That gives the dividend yield a premium over the two-year rate of 6.83%, which is the highest the premium AT&T's dividend has ever traded for vs. the two-year Treasury rate.

Over the past five years, AT&T has traded on average with a 4.5% premium over the two-year Treasury rates. For AT&T's premium to shrink to 4.5%, the stock's yield would need to drop to around 4.67%. With a dividend payment of $2.08 per year, the stock would need to rise to $44.50 to return its historical valuation vs. the two-year. Clearly, the market disagrees with that view.

Betting Shares Climb

However, some traders think AT&T's stock has some upside based on some recent options trades. On April 16, the open interest level for the June 18 $30 puts and calls saw their open interest levels rise by around 20,000 contracts each. Based on the data, it would seem a call spread was created where the trader bought the calls while likely selling the puts. This would suggest that the stock is trading over $30 by the expiration date in June.

There was a similar trade completed on April 8, but this time for the May 21 $30 calls. In this case, the trader bought 20,000 contracts and paid around 0.85 per contract. It would imply the stock is trading over $30.85 by the expiration date.

Trends Improve

Technically, the stock appears to have further upside. The relative strength index has been consistently trending higher since hitting oversold levels in mid October. Additionally, there's a strong uptrend in the stock that started around the same time. If the stock can clear resistance at $30, it has a path to rise to around $31.50. Resistance at $31.50 is the big challenge for the stock. If for some reason investors can get it above $31.50, then there's a chance it climbs to as high as $33.25. A failure to push over resistance at $30 will send the shares lower towards the uptrend at $28.50.

This could be the time for AT&T to deliver better than expected results and finally get the stock moving in a direction higher.

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This article was written by

Mott Capital Management profile picture
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Designed for investors looking for stock ideas and broader market trends.

I am Michael Kramer, the founder of Mott Capital Management and creator of Reading The Markets, an SA Marketplace service. I focus on 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. 

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.

Additional disclosure: Mott Capital Management, LLC is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future results.

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