AT&T: 2022 Smells Of Opportunity

Summary

• 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.
• Looking for a helping hand in the market? Members of Crude Value Insights get exclusive ideas and guidance to navigate any climate. Learn More »

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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.

Takeaway

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.

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.

Comments

[donamp123]

Smell the color of green on T, it's 2.22% up today.
T price should reach $28 by this weekend.
Long T.

[Bignitwit]

@donamp123 I wish T would hit $28 by this weekend. Ex dividend $0.52 on Friday. I would just hope for $26.21 (today's close) by this weekend, representing a nice break-even pop in stock price plus the dividend check forthcoming to the bank-a-roo!

Thursday futures up $0.19.

I am keeping the new Warner/Discovery shares that are coming in 2022 and staying very long T. HBO max had nice fourth quarter 2021 additions, so did postpaid phones.

Maybe Stankey is the real deal?

Good luck to you.

[donamp123]

@Bignitwit I smell color green that T will pay divvy on 1 February 2022.
Since my T's divvy is re-invested; that's mean the lower of T's price is more T shares added to my portfolio.
btw: T pays total divvy to me - more than my SS Benefits.
Long T.

[C.J.102929]

My first comment was erased, so this will be my last comment on Seeking Alpha.

[sourdo]

ON this first trading day of 2022, T and DISCA smell pretty freaking awesome!

To bad if you panicked and sold cheap. I saw this coming a mile away. T was way oversold.

Long T, Long DISCA

[Bignitwit]

@sourdo Tax loss selling for 2021 is over, which you knew and hoped would be the case for today's big gain. How will your current DISCA holdings fare with merger? Do your current DISCA get added with the newco shares?

Personally, I will hold my newco Discovery/Warner holdings.

Good luck to you!

[sourdo]

@Bignitwit
with the T shares, I get some more DISC, with my DISCA shares, I get some T.

I see an easy double with money invested, much of that due to the oversold T shares.

Good luck to you too!

[Horhay]

it definitely smells..

[craftbrewinfo]

AT&T flat out smells

[Mountain Walker]

@craftbrewinfo
I can think of a four letter word it smells like...

[Eileen Dover]

@craftbrewinfo Finally was able to sell out of the large batch of T I had accumulated for the dividend. You don't think I bought it for growth, do you? lol

[Northwest Investor]

You had me at "smells" . . .

Here's the short form on T: it's been a dealmaking company for decades, and they make bad deals. Over, and over, and over again, they used their cash flows to buy stuff, which never worked out, quite. Sure did pay a lot of investment banking fees, though.

A genuinely terrible value-subtracting allocator of capital.

The next acquisition should be their last, carve it up and sell it off into rational businesses owned by private equity for their actual business, not their pipe dream synergies. Could money be made there? Yes, but I'd want to see a management and a board committed to liquidation, rather than just folks reloading the balance sheet for another round of bad buys.

Just waiting for Leo Apotheker to join the board . ..

[mrbuseco2]

@Northwest Investor They do the bad buys as cover for funneling money to cronies and eventually back to their own pockets rather than pay out dividends to stockholders. Standard corporate shenanigans to dupe investors and pocket their money.

[HPBunker]

@Northwest Investor

"Just waiting for Leo Apotheker to join the board"

I remember him! He could give Randall Stephenson a run for his money...

[Lawrence Dickman]

@mrbuseco2
Hmmm, only 26 previous comments. Are you mrbuseco1 with a new username? 😋 😋

[jason-marks]

i know what stagnation smells like.. I've owned this stock in the past...

[kos47]

Is it me or the T articles are picking up again?

[Jacks Wasted Life]

@kos47 Funny that certain dog stocks always get the hype. This smells alright of being a paid promotion. Remember listening to a podcast that suggested most analyst, especially popular ones (Kramer) are paid to push turds.

[kata]

@Jacks Wasted Life

Kramer isn't paid to push anything but is sometimes a victim of groupthink.

[Jacks Wasted Life]

@kata Really you think analyst, especially the most vocal one isn't influenced (via money or some other bribes) to push stocks? I guess you also think the stock market isn't rigged? And the Clinton's are saints...

[Seeburto]

Well, now that tax loss selling is over, we will see.

[goodfellasfinancial]

@Seeburto Roth IRAs funds are ready to be deployed

[danielaqwe]

I am a customer of ATT, but only involuntary. This is because ATT and Comcast are the only internet and cable TV provider in the area. Both are gangsters and they treat their customers like dirt. I hate them both and hope they go down in flames. I will never own their stock and I will voluntary pay twice for any third provider in the area given a chance, as long as they do not screw me around.

Their cable TV installers are arrogant and incompetent bastards. I am an Electronics Engineer and know all there is to know about coax cable and electronic data communications... it was my job for 50 years.
Yet some bastard (installer) comes into my home and the first thing he does is to cut off all coax connectors of the wall outlets... why I asked, you did not even test the cables.
We always do that, he answered.... But now, the cables were too short to put on a new connector and needed to be replaced. This guy did not have a clue.

Anyway after the "teaser" period had expired, they double the price. Time to switch to Comcast, but they are just as bad.
To hell with them all.

[2live4divs]

@danielaqwe frontier is just as bad as that too!

[nerd_rage]

@danielaqwe If 5G ever really does allow true broadband service competition in America, then AT&T and Comcast are in trouble. They're not very good at competing with Netflix and Disney on content and if they lose their broadband monopolies, consumer ire will favor the new competitors who pop up and gleefully remind everyone how awful those two are, and we'll treat ya lots better.

Easiest marketing campaign in history. It'll be a replay of how Netflix destroyed video stores, broadcast, cable and the non-blockbuster theatrical movie simply by building a better mousetrap.

[brettze]

@danielaqwe you probably still need to replace your old coax cable with digital trip;le shielded cables to keep the radio noise out.. I use over the air antenna and tripleshielded cable connection to m TV to get clearest HDTV pictures.. but theOTA guys start chopping channels up to 8 channelsl per channel and reduce picture down to standard defintion, anyway.. I still get HDTV pictures sometimes

[umpire1]

fiber in our neighborhood, more of that should help T

[umpire1]

healthcare in union contract takes a chunk out of budget

[Hangin'Loose]

The notion that T management will be successful as soon as T divests all it's non-communication assets and "gets back to what it knows" is hilarious. The reason T acquired all of those non-communications businesses in the first place was because it was failing at "what it knows" and desperately wanted growth.

The idea that T management has somehow learned how to successfully manage comms is a joke.

[Bloom Investments]

@Hangin'Loose Just curious, why do haters of a stock care enough to read articles about the stock and comment on it.? Perhaps if I am short a stock and/or have sold call options, I would read articles and comment accordingly. But if I have sold my position on a stock and was not interested in investing in it again, then personally, I would likely not continue to follow it.?

[Hangin'Loose]

@Bloom Investments the operative word being “likely”.

Regrets that my post didn’t conform to your opinion.

[Bloom Investments]

@Hangin'Loose haha, I liked your response. And I agree with your comment on why management bought Time Warner in the first place. Wall Street rewards one thing above all, GROWTH. But at its core, T is a large-cap value play, not a large-cap growth play. And VZ's market cap is doing just fine as a value play, especially when compared to T's market cap.

I'm looking forward to T getting back to its core, which is arguably worth a market cap in the low to mid-200billions, in and of itself, like VZ. The WBD (f.k.a. TWX) component of T is a growth stock component that Wall Street is applying a value stock multiple to and needs to be extracted from T ASAP so that it can benefit from higher multiples attributable to other growth plays, virtually none of which pay any substantive dividends.

I understand that T's history of acquisitions is fairly shoddy (with certain exceptions like Cingular Wireless), but I think Stankey should get some props on moving in the right direction even if he was part of T's management team that lacked the foresight to realize that Wall Street would not continue to apply a growth multiple to the TWX component of T post-acquisition, yet T would still have to pay its huge dividend to the additional shares that were part of the TWX acquisition. Seems obvious in hindsight, and if T was still trading at $39 per share like it was immediately preceding-Covid, and Stankey was not talking about spinning off WBD, then I'd be selling T instead of buying T right now.

[Feckless191]

OTT streaming doesn't even work. They will never grow & profit if they can't make their streaming work.

[nerd_rage]

@Feckless191 OTT streaming is not the golden goose a lot of people seem to think. It's less lucrative than broadcast/cable that it's replacing (which is why it's so popular; people love the price break).

The only way to make it work is thru efficiencies of scale, and that's where OTT being seamlessly global compared with broadcast/cable is the saving grace. So a handful of big global streaming platforms can succeed, but it'll be terrible for anyone below a very high cutoff point.

[HPBunker]

"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 this is true, it's damning. Also, it's inconsistent with a "buy" recommendation on the stock. Any management team that would sell an asset for less than 1 x earnings is mentally deficient and unworthy of shareholder trust.

[MTMatt]

people say this every year

[Lawrence Dickman]

You Me T
💎🙌🦍🚀💪

[Jayrco]

What happened to the posting recommending a “Claw Back” of Stevenson’s multi-million dollar retirement gift?

[Gravity404]

@Jayrco Stevenson should be put in the elite class with Ballmer, Nardelli, and Fiorina. Total failures of epic proportions; with great publicists at their side. Paid to fail massively.

[wwn2001]

T is what smells.

[Merit1]

Attn: All “Ambulance Chasers”:
Want something that “smells of opportunity”?
How about a shareholder lawsuit against retired CEO Randall Stevenson for a breach of fiduciary duty…Let’s start with a clawback on his $65+M retirement package.