Is AT&T Stock A Bargain At $25?

AT&T stock (NYSE: T), which currently trades at $25 per share looks like a good investment opportunity at the moment. The stock is down 36% from the level of $39 seen in the beginning of 2020. It traded at $38 in February 2020 (just before the coronavirus pandemic) and it is currently still more than 34% below that level, as well. AT&T stock is, in fact, even below its March 2020 low of $27. The stock has significantly underperformed the market over the last one-and-a-half years because of a lackluster launch of its streaming offering – HBO Max, along with the acquisition of Warner Media not adding much to the top line in 2020 due to the pandemic severely hitting the movie and advertising revenues for media giants. Though the company beat analysts’ expectations for Q4 2021, the results were much lower on a year-on-year basis. Also, questions regarding how AT&T is going to structure its Warner Media merger with Discovery has also created some uncertainty for investors.

The company is now in a phase of offloading many of its business to focus mainly on its telecom and streaming business. We believe that AT&T stock is a good bet with strong growth expected in the telecom business, but the stock is unlikely to go back to the pre-pandemic level any time soon, due to rising competition in streaming and 5G businesses. You can see AT&T upside post Covid in our dashboard analysis.

2020 Coronavirus Crisis

Timeline of 2020 Crisis So Far:

• 12/12/2019: Coronavirus cases first reported in China
• 1/31/2020: WHO declares a global health emergency.
• 2/19/2020: Signs of effective containment in China and hopes of monetary easing by major central banks helps S&P 500 reach a record high
• 3/23/2020: S&P 500 drops 34% from the peak level seen on Feb 19, 2020, as COVID-19 cases accelerate outside China. Doesn’t help that oil prices crash in mid-March amid Saudi-led price war
• Since 3/24/2020: S&P 500 recovers 98% from the lows seen on Mar 23, 2020, with the Fed’s multi-billion dollar stimulus package keeping the economy afloat during the prolonged lockdown and the vaccination drive allowing things to gradually return to near-normal conditions despite several waves of Covid infections.

In contrast, here is how AT&T stock and the broader market fared during the 2007-08 crisis

Timeline of 2007-08 Crisis

• 10/1/2007: Approximate pre-crisis peak in S&P 500 index
• 9/1/2008 – 10/1/2008: Accelerated market decline corresponding to Lehman bankruptcy filing (9/15/08)
• 3/1/2009: Approximate bottoming out of S&P 500 index
• 12/31/2009: Initial recovery to levels before accelerated decline (around 9/1/2008)

AT&T and S&P 500 Performance Over 2007-08 Financial Crisis

AT&T stock declined from levels of about $42 in September 2007 (pre-crisis peak) to levels of $24 in March 2009 (as the markets bottomed out), implying AT&T stock lost 44% from its approximate pre-crisis peak. It recovered post the 2008 crisis, to levels of little over $28 in early 2010, rising by 18% between March 2009 and January 2010. In comparison, the S&P 500 Index saw a decline of 51% and recovered 48%.

AT&T Fundamentals Over Recent Years

AT&T revenues increased from $160.5 billion in 2017 to $171.8 billion in 2020, due to an increase in post-paid connections. Despite higher revenues, margins declined over recent years with EPS decreasing from $4.77 in 2017 to -$0.75 in 2020. Margins in 2020 were hit due to lower revenue (y-o-y), higher equipment costs, and high asset impairment. In FY2021, revenues came down to $168.9 billion, reflecting the separation of the U.S. Video business in the third quarter of 2021, and the impacts from other divested businesses. However, the company reported sharp improvement in earnings to $2.76/share in 2021 after a loss making 2020, mainly due to lower impairment costs.

Does AT&T Have Sufficient Cash Cushion To Meet Its Obligations Through The Coronavirus Crisis?

AT&T’s total debt decreased from $164.3 billion in 2017 to $157.2 billion in 2020, while its total cash went down from $50.5 billion to $9.7 billion over the same period. Debt has gone up to $177.5 billion at the end of 2021, while cash has increased to $21 billion. AT&T generated healthy cash from operation of $42 billion in 2021. Though the debt level is quite high, a healthy cash from operations generation capacity over recent years provides the company a liquidity cushion to weather the current crisis.

Conclusion

Phases of Covid-19 Crisis

• Early- to mid-March 2020: Fear of the coronavirus outbreak spreading rapidly translates into reality, with the number of cases accelerating globally
• Late-March 2020 onward: Social distancing measures + lockdowns
• April 2020: Fed stimulus suppresses near-term survival anxiety
• May-September 2020: Recovery of demand, with the phased lifting of lockdowns – no panic anymore with number of cases appearing to have plateaued
• October 2020-February 2021: Unprecedented surge in Covid cases forcing a fresh round of lockdowns across the nation
• Since March 2021: Ongoing vaccination drive and gradual re-openings drive an improvement in demand – buoying market sentiment

Despite the recent surge in the number of new Covid-19 cases in the U.S., we expect an improvement in demand to buoy market expectations. As investors focus their attention on expected 2021 and 2022 results, we believe AT&T stock has the potential for strong gains once fears surrounding the Covid outbreak are put to rest.

AT&T’s stock is valued at a P/EBITDA multiple of 6x, as can be seen in our detailed analysis on AT&T EBITDA.

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