AT&T: Bulls Vs. Bears

Written by Nathaniel E. Baker, Seeking Alpha editor and contributor.

AT&T Inc. (T) shares appear to have recovered from a Time Warner (NYSE:TWX)-induced bottom, rallying more than 10% since setting a 52-week low in July. The merger has effectively been finalized, though it could still be unwound on appeal.

With concerns over the merger (mostly) fading, the question now is whether the stock is worth buying at its current price. The Seeking Alpha community remains divided on this matter. A synopsis of six recent articles follows below, split evenly between three bullish arguments and three bearish theses. Read on and have your say in the comments section.

Bulls

  1. AT&T is a “strong buy,” as the company sports “an attractive dividend yield combined with excellent prospects for future top-line revenue growth,” according to David Bradshaw. The market is still discounting the stock with a “very low PE of six,” which appears to be due to lingering uncertainty surrounding the merger. These concerns are unfounded as the government’s claims that the merger harms competition have no merit, Bradshaw writes: “To me, it makes perfect sense why the government lost the first time around and why the case being under appeal is not concerning to me.”
  2. The company is in a much stronger market position after purchasing Time Warner, and the sell-off that followed the initial merger announcement has created a substantial buying opportunity, says Victor Dergunov. While the premium paid for TWC was “staggering” and AT&T had to increase its debt load to finance the deal, the result is “untapped potential growth opportunities.” AT&T can use its position to expand growth in the HBO segment it acquired by incorporating HBO Now into its data service plans for example. “The influence AT&T now possesses in the video, internet, and wireless connectivity, coupled with its newly acquired content empire, seems unparalleled,” Dergunov writes. If AT&T continues to beat EPS estimates by the same 6% average that it has in recent quarters, EPS will be $3.86 next year, implying a ratio of 8.8 times next year’s earnings. The stock is also likely to benefit from late economic cycle rotations, as investors move into more defensive, dividend-paying securities.
  3. The stock is currently cheap, trading at 9.8 times its blended P/E ratio compared to a 13.4 to 15.3 historical range, writes FAST Graphs Inc. Adding in the dividend means investors could see annualized returns of 24% the next two years. More conservative estimates would still see a 13.82% rate of return. There is a lot of potential upside as well. With the addition of what is now called WarnerMedia, AT&T has tripled its advertisement inventory. It can use its most recent acquisition, AppNexus, to target customers with the most relevant advertisements, leading to an increase in revenue.

Bears

  1. The company is heavily indebted and lacking any true catalyst to growth, according to Alpha Gen Capital. Secular trends in the telecoms and cable TV sectors are against AT&T as well, with the shift toward unbundling and skinny broadband continuing to reduce revenue and margin. “If the revenue trend continues, and we think it will not only continue but accelerate, then free cash flow can decline rapidly,” Alpha Gen writes. With interest rates continuing to rise, AT&T’s interest expenses (20% of the debt is floating rate) will increase as well. The TWC acquisition will not necessarily save the company either, if the DirecTV deal is any gauge.
  2. AT&T lacks competitive moats, could see its core business disrupted by new technology, and is no longer seeing rising demand for its core products, writes Charles Lewis Sizemore. The dividend payout ratio may not be as low as it looks either, as the company realized a $20 billion extraordinary tax benefit that will not be repeated. “I’ll be blunt: I hate AT&T,” Sizemore says, adding that he is referring to the stock and not to the mobile phone or home internet service (both of which he “dumped years ago because they’re overpriced,” presumably an indication he isn’t a fan of them, either).
  3. Positive effects of the TWC acquisition, specifically the increase to the bottom line, will take longer than expected to materialize and will not be as much as originally thought, writes David Alton Clark. A long-time bull who recently sold his T shares, Clark is one of few who anticipates hurdles from the government’s appeal of the merger decision. “Most pundits I hear talk about it say there’s nothing to worry about,” he says in his analysis. “I beg to differ.” Even if the appeal is denied, the size and scope of the merger makes it “more likely than not it will drop a few balls along the way.” Clark has experience on this subject, having in the past been a consultant for AT&T on cost reduction and avoidance measures.

Conclusion

The bull/bear divide on AT&T’s prospects appear to mostly come down to how well the company integrates the various Time Warner Cable assets. Bulls are excited about the possibilities. Bears are, well, bearish. The next year or two should see how this plays out.

While high debt levels are never positive, even bears concede the company’s free cash flow should more than compensate. Of course, bears would quickly argue that this equation could (or will) change in short order due to a dramatic reduction in revenues or higher interest payments. Where the macro picture is concerned, it’s true that this sector of the economy has no shortage of companies that were once seen as scions of stability but have since fallen quite far. “Google (NASDAQ:GOOG) (NASDAQ:GOOGL) ‘Nortel,’ a supposedly solid, well-run, blue-chip company,” Seeking Alpha user Cleo22 writes in a comment. “So many losses – most thought the impossible would never happen. It did.”

In general though, the Seeking Alpha readership appear slightly more bullish, based on an unscientific survey of their comments. “One for the better stocks for Stability, Dividends, Safety In ALL types of Weather Conditions and markets Ups and Downs,” writes g.dimit. “This is the new T. Once revenues from ad sells kick into high gear, this will hit $50,” says MetaPhysics.

Where do you stand on AT&T? Have your say in the comments below.

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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