Undervalued AT&T Is on the Right Path

Bulls Say

• AT&T has pulled together assets no telecom can match. It has direct contact with more than 170 million customers across various products, providing an opportunity to build deeper relationships.
• In the wireless business, AT&T has the scale to remain a strong competitor over the long term. Industry pricing should be more rational now that T-Mobile and Sprint have merged.
• WarnerMedia holds a broad array of content rights and has a strong reputation with content creators. AT&T shareholders will own 71% of this company after it merges with Discovery.

Bears Say

• The cost of maintaining dominance in wireless by controlling spectrum has been exceptionally high. AT&T spent more than $25 billion for C-band spectrum in 2021 with few prospects for incremental revenue.
• Advancing technology will swamp AT&T's wireless business, enabling a host of companies to enter the market and commoditizing this service.
• A massive debt load will eventually catch up with the company. The new Warner Bros. Discovery is being forced to take $43 billion of debt, leaving it highly leveraged. The remaining AT&T will still carry a heavy debt load as well.

Morningstar Analyst Mike Hodel Says

We believe management is putting AT&T T on the right path by shedding assets and refocusing on the telecom business, as well as investing aggressively to extend its fiber and 5G networks to more locations, which we believe will build on the company’s core strengths. The complexity of the Warner transaction and the intensity of this investment are likely to create a bumpy ride over the next couple of years, but we believe patience will be rewarded.

AT&T is the third-largest wireless carrier in the United States, but we believe it has adequate scale relative to Verizon VZ and T-Mobile TMUS to generate solid profitability. AT&T also benefits from its ownership of deep network infrastructure across much of the U.S. and its ability to provide a range of telecom services, particularly among enterprise customers. The plan to extend fiber to at least 3 million homes and businesses annually through at least 2025 builds on this position; it should allow the company to serve those locations directly and enhance wireless coverage in the surrounding areas.

In addition, we believe T-Mobile’s merger with Sprint greatly improved the industry’s structure, leaving three players with little incentive to price irrationally in search of short-term market share gains. We don’t believe Dish Network DISH presents a credible threat to the traditional wireless business. AT&T is also positioned to benefit as Dish builds out a wireless network, as the companies recently signed a 10-year wholesale agreement that generates revenue for AT&T and gives it access to Dish spectrum.

AT&T shareholders will own 71% of the new Warner Bros. Discovery. Warner remains a media powerhouse, with a deep content library and the ability to reach audiences across a wide variety of platforms. The company’s direct-to-consumer plans around HBO Max are gaining momentum, which should nicely augment and eventually supplant traditional distribution channels like cable TV. Adding Discovery’s DISCA nonscripted prowess and international presence should give the new company wider options to craft service offerings. Placing Warner under Discovery management as a stand-alone company brings focus and the flexibility to pursue a wide array of distribution partnerships.

Key Proprietary Morningstar Metrics

Fair Value Estimate: $35 Star Rating: 4 Stars Economic Moat Rating: Narrow Moat Trend Rating: Stable

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