AT&T Inc. (NYSE:T) is in a world of hurt. The once dominant communications giant is fighting a two-front war for the survival of its key wireless and cable businesses. What’s worse, AT&T has no answer for its subscriber losses … and not even the completion of its pending acquisition of Time Warner Inc (NYSE:TWX) will save T stock.
The battle AT&T is fighting is one for subscribers. On one hand, the company’s DirecTV and U-Verse cable TV offerings continue to lose subscribers to cord-cutters. And the trend is picking up steam. According to a recent UBS study, cable TV subscriptions are “on pace for a 3.3% decline in 2017 and 4.0% in 2018.”
On the other hand, wireless subscribers are jumping ship and heading toward low-cost providers like T-Mobile USA Inc (NASDAQ:TMUS). Furthermore, T-Mobile recently upped the ante by offering free Netflix Inc (NASDAQ:NFLX) to unlimited wireless subscribers.
This last point underscores why the Time Warner deal is too little too late to help AT&T. Wireless subs already have free content from T-Mobile … and others are sure to follow suit. Meaning the TWX deal will merely bring AT&T back to T-Mobile’s level.
As for cable TV, content providers are already making plans for a world with significantly lower subscription rates. In fact, Walt Disney Co. (NYSE:DIS) provided the final nail in the coffin for cable TV when it announced in early August that it was pulling its content from Netflix and starting its own online streaming service … one that includes ESPN.
With sports content now making its way into the realm of online streaming, it’s only a matter of time before cable TV margins shrink as providers move to cut prices to stop subscribers from leaving.
I think it’s safe to say, cable TV is dead.
All in all, this places AT&T far behind the game and on the hook with a Time Warner buyout that, despite its enormous price tag, will only serve to help AT&T play catch up.
AT&T’s Sentiment & Technicals
T stock’s sentiment backdrop has been in retrograde for some time. According to Thomson/First Call, only nine of the 29 analysts following the shares rate them a “buy” or better. Meanwhile, the 12-month price target generously rests about 10% north of T stock’s current perch near $37.
For contrarian investors, you’d think that the situation couldn’t get any worse, but most of those 20 bearish-leaning analysts maintain “holds,” leaving room for potential downgrades to “sell.” Price-target cuts are also a distinct possibility as the cord-cutting situation worsens for AT&T.
Click to Enlarge On the technical front, T stock is down roughly 13% this year, making it hard on investors even with the company’s 5.28% dividend yield. Making matters worse, short-term technical indicators are pointing toward additional losses.
Specifically, T stock’s recent run higher was capped by its 200-day moving average. The rejection pushed T back below its 50-day trendline, a moving average that is sure to provide resistance this week when T stock looks to challenge it once again.
A rejection at its 50-day moving average this week could send T stock back down to the $35 region, potentially putting this key support level to the test.
T Stock’s Options Outlook
T options traders appear to be preparing for a turn lower over the next month. Currently, the October put/call open interest ratio rests at 1.58, with puts comfortably outnumbering calls among front-month options. Peak October put OI currently numbers more than 60,000 contracts at the near-the-money $37 strike, with 35,000 and 26,000 put contracts at the $36 and $35 strikes, respectively.
Meanwhile, October implieds are pricing in a potential move of about 4.3% heading into expiration. This places the upper bound at $38.60 and the lower bound at $35.40. With several layers of technical resistance overhead, a move to $38.60 appears rather unlikely, unless news breaks on the TWX deal. A retreat toward $35 looks much more likely.
2 Trades for T Stock
Bear Put Spread: Barring any news on the Time Warner front, T stock will likely be rejected at its 50-day moving average next week. Traders looking to take advantage of such a rejection might want to consider an Oct $35/$36 bear put spread. This spread was last offered at 29 cents, or $29 per pair of contracts. Breakeven lies at $35.71, while a maximum profit of 71 cents, or $71 per pair of contracts — a potential return of about 144% — is possible if T stock closes at or below $35 when October options expire.
Bull Call Spread: On the other hand, news on the TWX front could provide T stock bulls with more fuel for the stock’s recent rebound off its lows near $35. While such news is unlikely to hit anytime soon, the possibility is still there. Traders looking to bet on a continued rebound for T stock on just such news might want to consider an Oct $38/$39 bull call spread.
At last check, this spread was offered at 15 cents, or $15 per pair of contracts. Breakeven lies at $38.15, while a maximum profit of 85 cents, or $85 per pair of contracts — a potential return of about 466% — is possible if T stock closes at or above $39 when October options expire. Clearly, the return is much higher on this trade, but the likelihood of a TWX buyout announcement is slim, and it would take nothing less to vault T stock back into the $39 region by October expiration.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.