AT&T (NYSE:T) shares continue to languish despite all the excitement created by its megadeal this summer, which brought Time Warner’s prized assets under its umbrella. Its stock is down about 13% this year, massively underperforming rival Verizon (NYSE:VZ) as well as the benchmark S&P 500.
This dismal performance shows investors aren’t keen to bet on AT&T’s turnaround at a time when the company’s existing businesses are struggling and the company still must successfully integrate Time Warner’s media assets into its mobile and pay TV strategy, assuming the Justice Department is unsuccessful in its appeal of the regulatory approval of the deal.
In its second-quarter earnings report in July, the Dallas-based telecom showed that it added fewer wireless customers than expected, with no sign that its main money-making unit is stabilizing after many quarters of uneven performance. But some analysts say now is the time to buy AT&T, when its valuations are near all-time lows. With a trailing 12-month price-to-earnings multiple of 6.6, the stock is cheap and a bargain, UBS analyst John Hodulik said in a note on September 21.
"We believe the stock is trading near all-time low valuations (and the widest gap to Verizon). Our work suggests the company will return to EBITDA growth ... given growth in Wireless & WarnerMedia and slower declines in Entertainment."
UBS raised the stock rating to buy from neutral with a 12-month price target of $38 a share. Shares closed yesterday at $33.76.
Deal Brings Lots of Growth Opportunities
The main catalyst driving these bullish forecasts is that AT&T, with newly acquired content sources, including CNN, HBO and Warner Brothers Studios, will turn into an entertainment giant that can feed exclusive programming to its 119 million mobile, internet and video customers. This unique combination will also put AT&T in a much better position to compete with disruptors such as Netflix (NASDAQ:NFLX) at a time when traditional pay TV customers are cutting cords at the fastest pace in the past five years.
Since the close of the Time Warner deal in June, AT&T introduced a new streaming video service. It also bought AppNexus, a prominent advertising technology company, showing investors that it’s well on track to becoming a modern media company.
Its newly-launched, skinny WatchTV offers 30-plus channels, featuring WarnerMedia outlets such as TBS, TCM and Cartoon Network and has been aimed at winning customers who have cut the cord or have never subscribed to a traditional pay TV package. AT&T charges $15 a month for WatchTV as a standalone offering, while offering it for free with the company’s unlimited data plans.
AT&T also plans to beef up HBO’s programming, the crown jewel from its WarnerMedia empire. “There is an amazing library of media and entertainment content that is really not being put to work, that’s available for direct-to-consumer distribution,” AT&T Chairman Randall Stephenson said last week at the Goldman Sachs Communacopia conference in New York.
As part of its new ad targeting strategy, AT&T plans to use AppNexus technology to build an advertising marketplace for digital video and television by serving up highly-targeted campaigns in a way that’s never been done before, particularly with video content.
Bottom Line
Despite these positive developments, the biggest concern scaring investors is AT&T’s ballooning debt. After the Time Warner deal, AT&T has become the most indebted, non-financial entity in the US, bringing AT&T's debt load to $180 billion.
As a result of this debt overhang, coupled with slowing growth in wireless subscribers and the cord-cutting at its DirectTV service, AT&T stock is unlikely to break out of its bearish spell anytime soon. AT&T needs to quickly show that, after the Time Warner deal, its newly diversified business is fueling growth in wireless and stemming the loss of pay TV subscribers.