AT&T Earnings: Strong Wireless Results Point to Cooler Competitive Dynamics

Key Morningstar Metrics for AT&T

• Fair Value Estimate
  : $27.00
• Morningstar Rating
  : ★★★★
• Morningstar Economic Moat Rating
  : Narrow
• Morningstar Uncertainty Rating
  : Medium

What We Thought of AT&T’s Earnings

AT&T’s T service revenue increased 2.7% in the second quarter, or about 2.0% excluding the Lumen fiber acquisition. This was the fastest pace in three years, driven by a jump in revenue per wireless customer. Adjusted EBITDA increased 5%, but management maintained full-year expectations at 3%-4% growth.

Why it matters: Competitive intensity in the wireless business appears to be easing. AT&T increased prices in April, but the pace of customer defections, or churn, was roughly flat with a year ago, and the firm added more net postpaid phone customers than a year ago (432,000 versus 401,000).

• Revenue per postpaid phone customer jumped nearly 3% versus the prior quarter to $58 after being stuck at or below $57 for two years. We suspect the allocation of bundle discounts between wireless and broadband partially drove this result.
• Still, with T-Mobile increasing prices on older rate plans in June, the industry seems to be retreating from the promotional intensity of the past 18 months. Residential broadband customer additions were also strong, especially on the fiber network, as AT&T drives bundle penetration.

The bottom line: We maintain our $27 fair value estimate for narrow-moat AT&T. Telecom valuations have been under pressure, likely caused by enthusiasm around the SpaceX IPO. The jump in AT&T shares on earnings has eliminated much of the discount to our valuation that had opened up.

• We’re torn on AT&T’s decision to accelerate share repurchases this year. We like the firm’s desire to capitalize on the drop in its share price. However, after buying spectrum from EchoStar, management doesn’t expect to reach targeted debt levels for three years. The need to purchase additional wireless spectrum could easily derail debt reduction.

Long view: Management forcefully reiterated that it has no interest in selling wholesale network capacity to SpaceX. AT&T expects to be able to fill wireless coverage gaps through its partnership with AST SpaceMobile.