Company Reports

We saw a lot of things to like in AT&T’s first-quarter results. The firm delivered near-record low wireless customer churn (the pace of customer defections) and increased revenue per wireless customer despite the network outage and resulting bill credits that hit in February. Cost-cutting and the slow pace of phone upgrades have buoyed margins, while network investment has moderated, yielding solid free cash flow. The fixed-line business services segment remains the primary weak spot for AT&T, with revenue and margins again contracting sharply. Our fair value estimate remains $23, and we believe the market is underestimating the stability of the US wireless industry.

We believe AT&T's strategy to invest heavily in its fiber network and expand 5G wireless coverage will solidify its competitive position. Rational competition in the wireless and broadband markets should allow the firm to deliver modest growth and solid cash flow, but the need to repay debt will limit shareholder returns over the next couple of years.

We don’t expect AT&T’s wireless network outage will have major long-term ramifications, but the firm could take a relatively small financial hit. We aren’t changing our $23 fair value estimate.

We believe AT&T's strategy to invest heavily in its fiber network and expand 5G wireless coverage will solidify its competitive position. Rational competition in the wireless and broadband markets should allow the firm to deliver modest growth and solid cash flow, but the need to repay debt will limit shareholder returns over the next couple of years.

AT&T’s fourth-quarter results and outlook for 2024 were generally consistent with our expectations, and we are maintaining our $23 fair value estimate. Free cash flow, per management’s definition, hit $16.7 billion during 2023, exceeding the increased forecast the firm provided last quarter. AT&T expects to generate $17 billion-$18 billion of free cash flow in 2024, with capital investment declining around $2 billion versus 2023. While management expects the business to grow about 3% during the year, the firm faces higher cash taxes and declining cash flow from the DirecTV joint venture, well-established headwinds it will face over the next couple of years.

We believe AT&T's strategy to invest heavily in its networks makes sense and will serve investors well over the long term. Aggressively extending fiber and 5G coverage to more locations builds on the company's core assets: its existing network and customer relationships. We don’t expect liabilities tied to lead-sheathed cables will derail AT&T’s ability to grow cash flow, but the matter does increase uncertainty somewhat.

AT&T delivered strong free cash flow during the third quarter, prompting management to update expectations for the year from “$16 billion or better” to about $16.5 billion. Wireless customer trends, while still not as strong as a year ago, also bounced back from a soft second quarter, as management had foreshadowed. We continue to believe the competitive balance in the U.S. wireless industry is improving, with the three major carriers poised to deliver steady growth and expanding cash flow. We are maintaining our $23 fair value estimate on AT&T, leaving the shares materially undervalued.

Increased transparency around free cash flow expectations and solid margin expansion seemingly weren’t enough to overcome concerns related to AT&T’s potential lead liabilities and a decline in wireless customer additions, which have weighed on the shares recently. AT&T struck a more defiant tone regarding the lead issue than Verizon, saying that lead was used in multiple types of infrastructure before the 1950s and that it has worked with regulators and employee unions for decades to ensure safe handling. We have slightly increased our capital spending estimates to reflect the potential need to remove lead-sheathed cables and modestly lowered our growth expectations, reducing our fair value estimate to $23 per share from $25. We continue to believe the market is overly pessimistic on AT&T's future.

We believe AT&T's strategy to invest heavily in its networks makes sense and will serve investors well over the long term. Aggressively extending fiber and 5G coverage to more locations builds on the company's core assets: its existing network and customer relationships. We don’t expect liabilities tied to lead-sheathed cables will derail AT&T’s ability to grow cash flow, but the matter does increase uncertainty somewhat.

AT&T has disclosed that lead-clad cable constitutes less than 10% of its copper network based on strand miles. Two thirds of this cable is buried or in conduit, and the vast majority of the remainder is strung on poles, with only a very small percentage underwater. The “overwhelming majority” of these cables remain in service. In a follow-up conversation, AT&T indicated that these figures encompass all of its potential exposure, including any abandoned cables. While these details don’t put the issue to rest, AT&T believes they provide a frame of reference concerning its potential liability. We continue to believe that AT&T shares are highly undervalued.

A series of articles in The Wall Street Journal concerning lead in cable sheathing dealt yet another blow to investor sentiment around telecom stocks. An analyst downgrade of AT&T citing potential legal liability, among other issues, further punished stocks across the industry Friday morning. While this situation warrants watching, we don’t expect the telecom industry will bear substantial legal liability. We believe AT&T and Verizon shares are very attractive at current prices.

Amazon’s potential entrance into the wireless resale business, as Bloomberg News has reported, reflects a risk to our view of the wireless industry. However, we expect the carriers will remain rational, and our fair value estimates on Verizon, AT&T, T-Mobile, and Dish Network are unchanged.

We suspect two things are weighing on AT&T shares after the company released first-quarter results: weak free cash flow and slower wireless customer growth. We don’t believe either is a cause for concern, and we are maintaining our $25 fair value estimate.

We believe AT&T's strategy to invest heavily in its networks makes sense and will serve investors well over the long term. Aggressively extending fiber and 5G coverage to more locations builds on its core assets—its existing network and customer relationships—and should allow AT&T to gradually expand its share of telecom spending.

We believe AT&T's strategy to invest heavily in its networks makes sense and will serve investors well over the long term. Aggressively extending fiber and 5G coverage to more locations builds on its core assets—its existing network and customer relationships—and should allow AT&T to gradually expand its share of telecom spending.

AT&T isn’t attracting as many wireless customers as it was a year ago, but it continues to post solid results. Customer retention was strong, but Verizon and T-Mobile seem to have effectively countered AT&T’s promotional efforts, which began in earnest about two years ago. Management expects wireless customer additions will decline in 2023 as industry growth slows from the torrid pace of the past couple years, which will benefit cash flow, but the firm also signaled that it will work to continue gaining share. We are maintaining our $25 fair value estimate and think the stock remains modestly undervalued.

The big three U.S. wireless carriers struck a generally optimistic tone at an investor conference this week. We expect Verizon, AT&T, and T-Mobile will post steady results for the fourth quarter, with modest industry growth and expanding cash flows continuing into 2023. We believe the three carriers’ shares are undervalued, with Verizon trading at the steepest discount to our fair value estimate.

Sentiment around the U.S. wireless industry, especially Verizon, has turned negative recently. We suspect industry bears hold two key contentions: First, the carriers will perpetually spend egregiously on their networks, primarily buying wireless spectrum whenever the government makes more available. Second, in an extremely mature market, these firms will beat each other up seeking whatever growth remains, punishing revenue and margins. As such, balance sheets will continually need repair and cash available for shareholders will be increasingly limited.

AT&T’s third-quarter results lend support to our view that the firm is poised to deliver steadily improving performance in the coming years. While wireless customer additions slowed, revenue per customer spiked higher, exceeding our expectations. The firm expects to meet or exceed financial targets for the year, including generating $14 billion of free cash flow. While AT&T has clearly backed away from the 2023 free cash flow target of $20 billion set following the Warner spinoff, management expects this metric to grow next year, which we believe to be very reasonable and provides comfort around the dividend. We are maintaining our $25 fair value estimate, and we think the stock is significantly undervalued.

We believe AT&T's renewed focus on telecom, along with a stronger financial position and a clear plan to invest in its networks, will serve investors far better than its previous media strategy. Aggressively extending fiber and 5G coverage to more locations builds on its core assets—its existing network and customer relationships—and should allow AT&T to gradually expand its share of telecom spending.