AT&T's stock is misunderstood. Here are five reasons Barclays says it can soar.

By Emily Bary

AT&T shares get an upgrade, with analyst saying company's recent decisions look better than those made by rivals

AT&T Inc.'s recent choices are starting to pay off, and the stock now has five "real catalysts" to send it higher, according to an analyst.

Barclays analyst Kannan Venkateshwar upgraded AT&T shares (T) to overweight from equal weight on Monday, writing that their valuation "continues to be weighed down by legacy investor perceptions." But the company could prove a strong performer this year, in his view - leaving a "unique window of opportunity" for investors.

To start, Venkateshwar likes AT&T's "more balanced growth profile" that's been helped by its churn performance. AT&T has been outperforming rivals Verizon Communications Inc. (VZ) and T-Mobile US Inc. (TMUS) on churn, or the portion of customers who leave a given service, and he thinks that gives the company flexibility.

"AT&T's ability to maintain its share of industry growth is not really impacted by its lower gross [addition] volume," he wrote. "In fact, if anything, this lower volume has helped reduce aggregate subscriber acquisition cost and working capital needs, thus improving both margins and free cash flow."

Further, while AT&T's wireless-service revenue growth may look similar to Verizon's on the surface, Verizon benefits from a push for fixed-wireless-access internet, or FWA, as well as agreements to be the network backbone for cable operators that offer mobile plans to customers.

"Despite these factors, [AT&T's] growth was not too different from [Verizon's], which implies better underlying organic growth profile," he wrote.

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Venkateshwar also likes the potential of AT&T's consumer broadband business, which is helped by its fiber investments.

"If present trends continue into next year and beyond, which should be possible due to the scale of non-fiber base organically shrinking and fiber passings expanding, AT&T will likely grow wireline broadband subscribers at a pace comparable to Verizon's FIOS business which has seen healthy growth in recent quarters," he wrote.

Additionally, AT&T's decisions in recent years look better than those made by rivals, in his view. "For instance, while the handset subsidy model pushed by AT&T in 2020 was initially expensive, it has been directly responsible for record low churn at present and therefore has increased lifetime values significantly."

And AT&T's decision to emphasize fiber when peers were pushing FWA "also seems farsighted as it is not only driving higher [average revenue per user] at present but will also provide longer term capital-structure resilience with respect to wireless capacity builds/spectrum purchases," Venkateshwar said.

The carrier is now in a position where it could get its debt ratio down to its 2.5-times target within a year, something he said "was inconceivable just a couple of years ago."

Finally, there's the stock's valuation, as it trades at a discount to Verizon's, despite what Venkateshwar sees as better and cleaner growth prospects. What's more, the stock trades at a discount to cable rivals that are staring down "much bigger structural growth issues and balance-sheet constraints."

Read: Charter continues to shed internet subscribers, reflecting cable's growth woes

Venkateshwar's price target on AT&T shares remains $20, 19% above where it was before he published his report. Shares gained 1.6% in Monday action.

-Emily Bary

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04-29-24 1708ET

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