AT&T (NYSE: T) risk / reward outlook is starting to look attractive

Band Richard Bowman

This article originally appeared on Simply Wall St News.

AT&T Inc. (NYSE: T) was a rare outperformance last week after Morgan Stanley analyst Simon Flannery upgraded his rating on the stock from “on par” to overweight. The stock gained 6.95% on Thursday, its biggest single-day gain in months – although the stock price is still down nearly 20% for the year. Flannery said the low prices created an opportunity and improved his rating, although he lowered the price target from $ 32 to $ 28.

In October, we mentioned that AT&T seemed undervalued, but uncertainty could continue to weigh on the price. It’s still true, but there are signs that we may be closer to a bottom.

We can summarize the key dynamics at AT&T as follows:

  • AT&T has been a disappointment for investors for the past decade. The net result is lower than it was in 2011 and the stock price has returned to 2009 levels. However, the decline in the stock price means that the dividend yield is now above 8% and that the company still has sufficient liquidity to cover this dividend.
  • AT&T is set to merge its WarnerMedia media asset with Discovery (Nasdaq: DISCA) and then distribute shares of the new entity to shareholders. This transaction should be finalized in mid-2022 and should help unlock shareholder value.
  • Once the deal is done, AT&T will be a 5G-focused telecommunications company. It has already made significant investments in this regard and these investments should start to bear fruit in the coming years.
  • The stock price has been under pressure over the past year – potentially due to a lack of clarity on the value of media coverage and how the company will cope with its massive debt load.

Low valuation vs uncertainty

AT&T involves uncertainty, but it also trades at a significant discount to our estimate of its fair value. This estimate is based on discounted cash flows – you can read more about the model here. AT & T’s cash flow is actually more predictable than most companies, and the estimate of fair value represents virtually no growth – so this estimate is probably more conservative.

NYSE: T Discounted Cash Flow December 17, 2021

Looking forward:

In recent months, analysts’ recommendations for the stock have moved from neutral to sector weighting to overweighting. AT&T is not out of the woods yet, but there is reason to believe it could be nearing a bottom and that the rebate offers a margin of safety.

On the other side of the coin, there are two potential catalysts that could lead to surprises on the upside. First, investor interest in the company may increase as media asset unbundling approaches (currently slated for mid 2022). And second, expectations for the telecommunications sector are low and therefore may improve.

This article is not intended to be a comprehensive analysis of AT&T, but to highlight the trade-off between uncertainty and valuation. If you want to better understand the business, check out AT & T’s business page on Simply Wall St.

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Richard Bowman, analyst at Simply Wall St, and Simply Wall St have no positions in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Martin E. Berry