AT&T (NYSE:T) stock has struggled over the past several years as the telecommunications giant has been weighed down by a plethora of headwinds, including cord-cutting, wireless price competition, stagnating streaming growth, and a rising debt load.
T stock peaked near $45 in mid-2016. Ever since, AT&T stock has been down and out. Today, the shares trade hands at prices that are more than 25% below those peak 2016 levels.
But T stock scored a huge win recently. The proposed merger between wireless peers T-Mobile (NASDAQ:TMUS) and Sprint (NYSE:S) looks like it will receive regulatory approval after FCC Chairman Ajit Pai told Bloomberg that, in light of their recent concessions, he is going to recommend that his colleagues approve the merger.
That’s a big win for T stock. Wireless price competition has been a huge headwind for AT&T stock, especially wireless price competition from T-Mobile and Sprint. Both of those companies have compensated for often worse coverage than AT&T and Verizon (NYSE:VZ) with aggressive price cutting. Now, those two aggressive price cutters are combining. That means the wireless telecom industry will have one less overly aggressive price cutter, indicating that price competition across the whole industry will decline.
As a result, the margins and stability of AT&T’s core wireless business will improve. That’s a big deal for T stock because the company’s mobility business generated about 40% of its revenues last year. As the revenue and margin trends of that huge business rebound over the next several quarters, T stock should rally from today’s depressed base.
AT&T’s Mobility Trends Should Improve
AT&T has always been a really large company with a lot of moving parts. After its recent acquisition of Time Warner, its business got even bigger, with even more moving parts. Among the company’s businesses are wireline. entertainment. HBO, the Turner stations., Warner Bros studio and its international assets.
But its most important holding is still its mobility business, which generates about $70 billion of revenue and about $30 billion of EBITDA each year. Mobility represents roughly 40% of AT&T’s revenues and over 50% of its EBITDA. Thus, integral to the success of AT&T stock is the success of AT&T’s mobility business.
The mobility business has done just fine over the past several years, adding several thousand wireless subscribers each year and gradually expanding its EBITDA margins from the mid-30’s earlier this decade to the lower-40’s last year.
But this business has been held back by stiff competition. Specifically, the price discounts of T-Mobile and Sprint have become tremendously aggressive over the past few years, inevitably creating somewhat of a drag on AT&T’s subscriber growth and margins. That’s because some of AT&T’s customers are fleeing to Sprint and T-Mobile, while AT&T has tried to stymie that trend by cutting its prices.
That era is officially over. T-Mobile and Sprint will likely become one combined company in the near future, meaning that there will be one less overly aggressive price cutter in the market. Thus, going forward, AT&T’s mobility trends should improve. In other words, the business’ EBITDA margins should move materially higher, driven by less steep discounting.
As those margins improve, AT&T stock price should rally.
AT&T Stock Is Too Cheap to Ignore
In a nutshell, T stock is simply too cheap to ignore, and any and all operational improvements at these valuation levels should spark a sizable rally in AT&T stock price.
Here are the valuation metrics of AT&T stock:
- Forward price-earnings multiple of nine, miles below the market’s average forward multiple of 16 and the stock’s five-year average forward multiple of 12.
- Dividend yield of 6.3%, miles above the market yield of roughly 2% and the stock’s five-year average yield of 5.4%.
- Trailing price-cash flow multiple below five, also well below the market’s average cash flow multiple of 13 and the stock’s five year average cash flow multiple of nearly 6.
AT&T stock price is dirt cheap, with a single-digit forward earnings multiple, a 6% yield, and a cash flow yield above 20%. This stock is too cheap to ignore any operational improvements, especially any improvements by the all important mobility business. Thus, if AT&T’s mobility business materially improves over the next few quarters, T stock should subsequently rise.
The Bottom Line on T Stock
The fundamentals underlying AT&T have been challenged by non-cyclical headwinds for the past several years, and as a result, T stock now trades at dirt-cheap valuation levels. Indeed, AT&T stock price is so cheap that any and all operational improvements by AT&T should spark a meaningful rally by T stock.
Over the next few quarters and years, AT&T’s most important business – its mobility unit – could substantially improve. As it does, T stock should rise. The increases of AT&T stock price, on top of a 6%-plus yield, should make the returns of T stock attractive over the course of the next few quarters.
As of this writing, Luke Lango was long T, TMUS, and S.
