AT&T Inc.: Why T Stock Can Reach $60

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.

AT&T Inc.: Why T Stock Can Reach $60

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.

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