AT&T (NYSE:T) continues to trade sideways as the share price hit a six-year low in December. Even a recent bounce still leaves T stock about flat to where it traded back in mid-2012.
Admittedly, shareholders have benefited from healthy dividends,. But in a bull market, T stock has badly underperformed. In the past two years, the S&P 500 index has increased 17.4% while AT&T stock lost 27.3%.
And I’m still not sure why that is supposed to change going forward. T stock is cheap, and fundamentally I can see a case for upside heading into 2019. But there’s a core problem here: AT&T at this point is a collection of relatively unattractive businesses.
And unless the communications behemoth somehow is greater than the sum of its parts — which I continue to doubt — that problem should keep a lid on the AT&T stock price.
A Struggling Business
On its face, AT&T stock looks cheap. But it’s worth taking a step back and considering the business, not just the stock. Aside from Time Warner, revenue growth this year likely will be flat to down.
The Mobility segment will generate a bit less than 40% of that revenue. Wireless is a brutal business, one I’ve in the past called a “circular firing squad“. Competition is intense — and based largely on pricing.
In mobile, AT&T isn’t performing all that well, either. Net adds are well below those of T-Mobile (NASDAQ:TMUS), and fellow giant Verizon Communications (NYSE:VZ). T-Mobile revenue rose 6% last year and Verizon grew sales nearly 5% in its wireless segment. AT&T? Sales rose just 0.4%.
Business Wireline should generate 13-14% of total sales. That business is in outright decline, with revenue declining more than 8% in 2018 after a 5%+ drop the year before.
The Entertainment Group — DIRECTV, DIRECTV NOW, and U-verse — should drive around a quarter of 2019 revenue. Its sales dropped 7% in 2018; EBITDA (as defined in the AT&T 10-K) fell 9.6%.
The remainder of revenue will come from the WarnerMedia business, Xandr, and AT&T’s international operations. WarnerMedia did have a strong Q4, with revenue up 6%. But that’s in a quarter where the studio side of the business had a monster — and record — quarter, due to the strength of releases like A Star is Born and Aquaman.
Home Box Office (HBO) remains a valuable asset, but it’s worth remembering the operation drives just ~4% of pro forma revenue. Xandr is even smaller, created by the admittedly intriguing acquisition of AppNexus. The Latin America operations, too, are in the range of 4% of sales.
Overall, few of the businesses are growing — and several are in decline. That seems to be an obvious problem for AT&T stock.
Should the AT&T Stock Price Be This Cheap?
A closer look at the individual businesses also shows why AT&T stock should be reasonably cheap. Most stocks in similar industries are trading at rather low multiples themselves.
Verizon trades at about 12x 2019 EPS estimates, and T-Mobile about 19x. Both multiples admittedly are much higher than that of AT&T, but those two companies again are outperforming AT&T in terms of growth and have much less debt on the balance sheet.
Wireline competitors, meanwhile, are struggling badly. Windstream (NASDAQ:WIN) is blowing up. CenturyLink (NYSE:CTL) just halved its dividend and trades at 10x forward EPS.
DIRECTV rival Dish Network (NASDAQ:DISH) trades at 13x earnings, and is down 60% from late 2014 highs. That’s despite the company’s accumulation of unused spectrum, which likely still has some value.
For WarnerMedia peers, valuations look about the same. AMC Networks (NASDAQ:AMCX), even with a recent rally, trades at under 9x earnings. CBS Corporation (NYSE:CBS), Viacom (NASDAQ:VIA), and Discovery Communications (NASDAQ:DISCA) all are at single-digit multiples.
On a consolidated basis, AT&T does look cheaper on a price-to-earnings metric. But considering the debt and the clear risk of declines at DIRECTV, U-verse, Turner networks, and the Wireline business (combined, close to half of revenue), it probably should be.
The Cases For and Against T Stock
To be fair, it is possible that even with these concerns, T stock simply is too cheap. I’ve long been a skeptic, but looking at 2019 guidance I do see some room for cautious optimism.
First, AT&T should make progress paying down debt this year. Free cash flow is guided to $26 billion; after roughly $14 billion in dividend payments, the remainder will go to reducing borrowings. With some help from asset sales — notably the company’s stake in Hulu, which likely will be sold to Disney (NYSE:DIS) — the company expects to get debt at year-end to 2.5x adjusted EBITDA. That’s a relatively reasonable figure, particularly given the solid base of revenue and profits from the wireless business (even if that segment isn’t growing).
Second, AT&T has the potential to cross-sell and drive value from subscribers across its businesses. A new streaming service, backed by WarnerMedia content, should arrive later this year. The existing base of subscribers – whether for wireless or the Entertainment Group – provides a ready-made group to which to market that product.
But there are worries here, too. WarnerMedia content doesn’t compare to that of Disney, which is rolling out its own streaming service. It certainly comes nowhere close to that of Netflix (NASDAQ:NFLX). AT&T CEO Randall Stephenson acknowledged on the Q4 conference call that the company wasn’t trying to take on either rival. And DIRECTV NOW clearly has lost out, which raises the question of why the WarnerMedia streaming service will perform much better.
As for cross-selling, that hasn’t really worked so far. While it was the rationale used for the DIRECTV acquisition, that now looks close to disastrous. 5G perhaps helps the cause — Stephenson has cited the potential for wireless to displace broadband — but price competition likely offsets some of that tailwind, and it’s far from certain that even 5G can manage rising bandwidths.
At the end of the day, it’s still difficult to make a compelling qualitative case for T stock. Large chunks of the business are in decline. The key growth initiative, by management’s own admission, is going to be a second-tier streaming offering in a crowded marketplace. Strategic efforts haven’t been great, with DIRECTV a miss and Time Warner acquired just as cord-cutting trends accelerate.
In the context, a cheap AT&T stock price isn’t enough and it hasn’t been for almost seven years. I remain skeptical that this time is any different.
As of this writing, Vince Martin has no positions in any securities mentioned.
