AT&T Earnings: We Think the Market Is Overly Worried About Lead and Customer Growth

AT&T Stock at a Glance

• Fair Value Estimate: $23.00
• Morningstar Rating: 5 stars
• Morningstar Uncertainty Rating: Medium
• Morningstar Economic Moat Rating: Narrow

AT&T Earnings Update

Solid margin expansion and increased transparency around free cash flow expectations seemingly weren’t enough to alleviate concerns related to AT&T’s T potential lead liabilities and a decline in wireless customer additions, which have weighed on the company’s shares recently.

The firm struck a more defiant tone regarding the lead issue than Verizon VZ, saying lead was used in multiple types of infrastructure before the 1950s, and that AT&T 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 have modestly lowered our growth expectations, reducing our fair value estimate for AT&T stock to $23 per share from $25. We continue to believe the market is overly pessimistic about the company’s future.

AT&T added only 326,000 net postpaid phone customers during the second quarter, down from 813,000 a year ago. Management foreshadowed weakness recently, saying a large enterprise customer loss and the initial customer reaction to new T-Mobile TMUS and Verizon rate plans would weigh on growth. The rate of customer defections ticked up only slightly versus a year ago, which we believe is a major positive. However, AT&T isn’t attracting new customers as quickly, indicating it is losing ground to competitors. As with Verizon, revenue per postpaid wireless customer was solid, driving wireless service revenue up 5% year over year.

Also in line with Verizon, the number of customers upgrading phones dropped sharply, pressuring AT&T’s total revenue growth but boosting profitability. Consolidated revenue increased 1% versus a year ago, but EBITDA was up 7%. Free cash flow rebounded from a weak first quarter. In the year to date, AT&T has generated $5.2 billion in free cash flow, per management’s definition, up from $4.2 billion in 2022. It expects to generate around $11 billion of free cash flow in the second half of the year, with $4 billion to be used to reduce net debt.