- AT&T had a rough 2021 fiscal year from a shareholder return perspective even though the company generated significant cash flow during the year.
- This served as a restart year for the firm, with management taking the time to prepare the company for the long haul.
- Although 2021 was disappointing, investors need to focus on the bright future the company offers.
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The year 2021 proved to be a time of significant turbulence and change for telecommunications and entertainment conglomerate AT&T (NYSE:T). The company announced significant restructuring in the form of asset sales, as well as some other interesting strategic moves aimed at creating shareholder value in the long run. The market did not behave particularly kindly when it came to some of these developments, but I and other AT&T bulls believe that the long-term outlook for the business is favorable. With 2021 now over and a new year having begun, it is time to consider the past and look forward to the future to see what kind of opportunities in this firm, if any, long-term, value-oriented investors might have.
A rough but transformative year
Nobody will deny that 2021 proved to be a difficult year that tried the patients and wallets of investors in AT&T. This much is apparent when you look at the numbers. Even after factoring in the distributions investors received, the company generated a loss for shareholders of 8.1%. This is painful but not exactly disastrous. But it pales in comparison to the strong 21.6% return investors saw from the S&P 500. Clearly, the sentiment regarding AT&T was incredibly pessimistic.
This is not to say that the company performed poorly from a fundamental perspective. We will not know financial performance for the fourth quarter last year until the company releases that information on January 26th. However, we do know that management has been forecasting free cash flow for the business of $26 billion. This is based on the capital expenditure budget of $24 billion, which implies operating cash flow for the company of $50 billion. Following the completion of all of its major financing and divestiture transactions, management expects free cash flow on a forward basis to be about $20 billion annually, implying operating cash flow of about $44 billion per year. No doubt, the company has benefited significantly from cost cutting initiatives that have achieved approximately half of the $6 billion in annual cost reductions so far, and it is looking to benefit from further cost cutting in the future.
Through various asset sales, many of which have already been completed as of this writing, the company has successfully reduced debt However, this is just the beginning. The company is still waiting for its massive WarnerMedia transaction to take effect, a move that will bring in cash and debt securities for the company in the amount of $43 billion. That will not be completed by the end of this year though. Based on my calculations from a prior article and factoring in recent data from the company's third quarter from this year, net debt following the completion of the WarnerMedia transaction should eventually fall to about $50.87 billion. This ignores the extra cash flow the company would generate between now and then. This compares to the $147.51 billion the company had in net debt as of the end of its 2020 fiscal year.
Until we see precisely how the dust settles from these maneuvers, it remains to be seen what kind of value, if any, the company will offer shareholders. But after accounting for the recent changes that management has announced and for which guidance has been provided, I did calculate that the firm is trading at a forward price to operating cash flow multiple of 4.1 and at a price to free cash flow multiple of 9.4. Meanwhile, its EV to EBITDA multiple is about 5.3. Free company that produces this kind of cash, such a low valuation just does not make sense. This leads me to believe that the company is setting investors up for a great 2022.
What needs to be added to this, however, is that there are still some unknowns that need to play out. For instance, we do not know what other assets, if any, management would choose to divest. And we don't know the impact those sales will have on the company's bottom line. The greatest example of this can be seen from the recently announced sale, made public on December 21st of this year, of the company’s Xandr unit to Microsoft (MSFT). This particular enterprise was focused on the programmatic advertising market space.
Starting in 2020, AT&T began reporting financial figures for this unit in the company’s larger WarnerMedia operations. However, we do know that from 2017 to 2020, sales associated with this unit expanded from $1.37 billion to $2.09 billion. Profit figures were not provided for 2020, between 2017 and 2019, operating profits associated with segment grew from $1.20 billion to $1.32 billion. It is likely that profits were similar in 2020. Management did not disclose what kind of price they got for the Xandr business, but one source, the Los Angeles Times, cited individuals familiar with the matter who claimed that the company was sold for just $1 billion. If so, that would be disappointing to see. Because based on the profit figures alone, the segment should be worth far much more than that. Either way, this just goes to illustrate the curveballs that can come out of left field they have the potential to either create significant shareholder value or impair it.
Even with this uncertainty, and even if management makes some maneuvers that are suboptimal, the math supporting the bullish case for investors seems clear to me. While it is possible that the large WarnerMedia transaction will not be completed until 2023, what the company is shaping into is undoubtedly a leaner operation with the potential to generate strong cash flows for investors. It is true that the company will likely cut its distribution following the completion of these transactions, but such rightsizing is to be expected in situations of this nature. So long as management puts the cash that it does retain to good work, both probably reducing debt and making value added transactions, the outlook for shareholders in the long run looks very likely to be positive.
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This article was written by
Daniel is an avid and active professional investor.He runs Crude Value Insights, a value-oriented newsletter aimed at analyzing the cash flows and assessing the value of companies in the oil and gas space. His primary focus is on finding businesses that are trading at a significant discount to their intrinsic value by employing a combination of Benjamin Graham's investment philosophy and a contrarian approach to the market and the securities therein. Learn more.
Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such 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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