AT&T Inc. (T) has been one of the best performing large-cap stocks of 2016, up more than 25%. At nearly $44, AT&T stock has continued to trade higher even after the Brexit fallout, and is now trading at prices we have not seen in years.
The big question now is how much higher can AT&T stock go?
Some might think that AT&T is approaching or perhaps already surpassed fair value. Yet, despite the relatively large gains in the low beta telecom security, T stock trades at less than 15x next year’s expected earnings per share.
Further, with AT&T expected to create at least $17 billion in free cash flow this year, AT&T stock trades at just 15x this year’s FCF. Therefore, both its earnings and FCF multiples are very attractive, especially for a company that will grow at a double digit rate this year.
With that said, AT&T should create at least $3 per share in earnings next year. If it can continue to support the same 17.7 price-to-earnings ratio next year as it does today, T stock will end 2017 at $53.50 per share.
However, if AT&T stock continues to grow faster than earnings, and multiple expansion pushes it to a multiple of 20, then AT&T could very well trade at $60 per share. As a result, T stock could in fact reach $60.
Will AT&T Stock Reach $60?
In my opinion, it is very likely.
First, investors clearly seek shelter from the turbulent performance of today’s market, and can find it with T stock’s 4.4% dividend yield beta of 0.34. With the dollar strengthening against the euro and pound, investors want stocks with minimum exposure to Europe and heavy exposure to the U.S. dollar. AT&T certainly falls in this category.
That said, most economists and analysts covering the debacle in Europe agree that any effects won’t be felt for at least a couple years. This alone suggests the market will recover. As a result, the big question for AT&T stock is whether investors will still find it attractive if and when the market starts to recover.
With AT&T stock cheap and the company growing, it is a rare stock that should perform well in any market. The company creates about 40% of its annual revenue from the very consistent Business Solutions segment with 75.8 million business wireless subscribers.
Beyond that, AT&T has a number of growth catalysts that could allow T stock to support a multiple north of 20. Its ad sales are now a $1 billion+ business, thereby making it a legitimate growth business for AT&T.
The company also has new initiatives that it will develop further over the next year, which include Internet of Things in cities and cars and the potential for a large broadband rollout in Latin America to offer triple play services.
Finally, Mexico is the largest catalyst. In its first quarter in Mexico, AT&T added 529,000 wireless net additions. What makes this so impressive is not just its newness in Mexico, but that AT&T has deployed its 4G network for just 51 million of the 100 million consumers in its addressable market.
By the fourth quarter of this year, AT&T expects its 4G rollout in Mexico to be nearly complete. That means growth should accelerate, and become more of a catalyst.
With all things considered, it is very likely that AT&T stock trends higher to support a multiple of 20. This is especially true when you consider its dividend, low beta and growth drivers like advertising, IoT, wireless and Mexico.
What’s even more encouraging than T stock’s upside is that it implies recent gains are here to stay, and that even after a 21% rally in 2016, AT&T stock is still a great investment opportunity.
As of this writing, Brian Nichols owns shares of AT&T.
