AT&T’s Upgraded Outlook Spurs Stock Increase

The Background

AT&T’s (NYSE:T) shares jumped approximately 2% in premarket trading on Friday following Oppenheimer’s decision to upgrade the stock to Outperform with a $21 price target.

The Upgrade

The analysts highlighted that AT&T had lagged behind the market and its peers during a challenging transition period to reposition itself as a pure connectivity provider.

Positive Momentum

According to the analysts, the headwinds that previously affected AT&T are now diminishing, and the stock is poised to benefit from various tailwinds.

The company’s network witnessed substantial improvements in 2023 after receiving its entire 120MHz C-Band portfolio, now covering over 200M points of presence (POPs), capable of supporting more hotspot data and Fixed Wireless Access (FWA). Additionally, the analysts estimate that increasing core unlimited plan prices by $0.99/line will generate an extra $700M to $800M in revenue, a factor not yet accounted for by the Street.

Enterprises will be pleased to hear that 60% of AT&T’s broadband subscribers are now on fiber, allowing the company to enjoy healthier margins and potentially raise rates further, as it currently prices its broadband below cable. The analysts also noted that AT&T is now monetizing excess wireless capacity through FWA, a move that could potentially add 500K to 1M subscribers per year.

Financial Transformation

The analysts also anticipate AT&T’s ability to consolidate its remaining stake in DirecTV, resulting in further cost-saving synergies. However, it is important to note that DirecTV is still contributing around 15% to Free Cash Flow (FCF), albeit declining at a significant rate.

AT&T’s strong FCF, projected to grow by 12% to $18.5B in FY24, is expected to pave the way for a robust balance sheet a year from now, with 95% of its debt fixed, majority maturing beyond 2033, and an average interest rate of about 4%.

Financial Projections

The analysts have adjusted the company’s FY24/25 revenue and EBITDA to incorporate an additional $700M in revenue from the recent price increase. This adjustment stems from better margins attributed to a favorable fiber broadband mix shift in Consumer Wireline but does not affect the analysts’ estimates for mobile or broadband subscribers.

The Verdict

AT&T (T) holds a Hold rating within Seeking Alpha’s Quant Rating system but consistently surpasses market performance. On the other hand, the average rating from Seeking Alpha authors and Wall Street analysts both lean towards a Buy, indicating a more favorable outlook.