The premise of a multi-pronged AT&T (NYSE:T) is a compelling one. With exposure to wireless, broadband, cable TV and now video entertainment, the telecom giant has plenty of related products in its portfolio. As a result, the company has outstanding cross-selling opportunities that, if they materialize, will boost AT&T stock.
The actual chemistry of the mix thus far, however, isn’t quite working out as AT&T had hoped. AT&T stock fell more than 7% on Wednesday following its third-quarter report. AT&T earnings suggest that the organization is having a tough time coordinating all of its units in a productive manner.
In some cases, external headwinds may be hurting AT&T’s businesses, while in other cases — notably Time Warner — more time may be needed for AT&T to figure out exactly how to make its new businesses work. But in any event, the company is going to have to do something significant, and it will have to do it quickly.
AT&T Earnings Recap
For the quarter ending in September, AT&T turned $4.7 billion worth of revenue into an operating profit of 90 cents per share. The top line was better than analysts’ consensus estimate of $45.4 billion, but the bottom line missed the consensus outlook of 94 cents per share. The company earned 74 cents per share on sales of $39.8 billion in the same quarter a year earlier. Its Time Warner unit contributed 5 cents of its EPS this year.
AT&T’s free cash flow of $6.5 billion easily topped the year-earlier figure of $5.5 billion, and its EBITDA of $15.4 billion was decidedly better than the year-earlier figure of $11.8 billion.
The telecom company added 4.3 million wireless customers in North America during Q3, leading to a 2.3% rise in mobile service revenues. Nevertheless, there was a number of red flags in AT&T earnings.
Chief among them was the net loss of 359,000 DirecTV satellite television customers, as cheaper alternatives like Netflix (NASDAQ:NFLX) continue to lure customers away from more traditional television viewing. AT&T has its own entry in the streaming race, called DirecTV Now. But that venture is not showing strong forward progress. It only added a net total of 49,000 subscribers last quarter, versus analysts’ expectations for net additions of 287,000.
The EBITDA of AT&T’s entertainment division sank 8.6% to $2.4 billion, likely due to what has become a price war sparked by the streaming-video market.
Not Good Enough… Yet
The results weren’t “bad,” despite the earnings shortfall. But the Q3 earnings left owners of AT&T stock believing that the company is not as cohesive as it should be after years of capital investments and acquisitions.
Wells Fargo senior analyst Jennifer Fritzsche believes at least part of the struggle may simply stem from having too many irons in the fire. In the wake of the Q3 results, she wrote “I think the concerning part is that they just have so much on their plate.”
Bloomberg Opinion writer Tara Lachapelle essentially agrees that AT&T is overwhelmed, noting “DirecTV is the headache AT&T never needed. And to right that wrong it’s made another splashy acquisition far outside the Dallas-centric telecommunications management team’s area of expertise.” Lachapelle added that had AT&T not waded so deeply into unfamiliar waters, AT&T stock may be performing more like telecom rival Verizon Communications (NYSE:VZ), which posted impressive Q3 results just a few days ago, catapulting its stock higher.
Yet true buy-and-hold investors have to appreciate that AT&T is a work in progress; what it is today isn’t what it will be a year from now. One of many projects it has in the works is a more formidable competitor to Netflix; that venture is tentatively slated to launch late next year. With Time Warner’s content at the company’s full disposal, AT&T may be able to overcome a number of the obstacles it has been facing. And, Fritzsche ultimately conceded “I think the AT&T longer-term strategy is still very much on target.”
The Bottom Line on AT&T Stock
The company reaffirmed its full-year EPS guidance of “at the high end of the $3.50 range,” versus the consensus estimate of $3.52. That’s a marked improvement on last year’s bottom line of $3.05 per share. Analysts on average expect the company’s sales to grow more than 8% in 2019, and their consensus 2019 EPS estimate is $3.61.
Those numbers aren’t exactly overly ambitious, either. Odds are good that AT&T will meet or exceed those estimates.
So why is AT&T stock, now trading at a forward price-earnings ratio of only 8.5, still in the tank? The weakness of T stock may have more to do with circumstantial psychology than actual fundamentals. Netflix continues to grow, Verizon has made wireless at-home broadband a reality, and plenty of companies now boast their own movie and television studios. AT&T isn’t exactly impervious to its growing competition.
Still, while perceptions can and do change over time, results don’t. AT&T is still growing its top and bottom lines, and will likely continue doing so for the foreseeable future. So the selloff of AT&T stock may well be a buying opportunity, even if most on Wall Street aren’t choosing to see it that way.
As of this writing, James Brumley held a long position in AT&T stock. You can follow him on Twitter, at @jbrumley.