Telecom and media conglomerate AT&T (NYSE:T) has failed to convince investors with its recent earnings metrics. T stock has just hit a 52-week low of $23.96 — a level that is also the lowest in the past decade.
In late 2011, T stock was trading between $28 and $30. In July 2016, it was shy of $44. Then, AT&T shares began 2021 around $29. However, shares have slumped following after seeing a 52-week high of 33.88 in mid-May. They currently hover around $24, down about 16% year-to-date (YTD).
Although, AT&T has been a dividend investors’ darling in recent quarters, the company has been struggling with declining revenues since the start of the pandemic. Then, in May, management announced a restructuring by splitting off WarnerMedia, which will merge with Discovery (NASDAQ:DISCA, NASDAQ:DISCB), to create a standalone company, namely Warner Bros. Discovery. The merger is expected to close by mid-2022.
Moreover, in August management finalized the DirecTV spinoff. Put another way, AT&T has repositioned itself to solely focus on its core asset including wireless and telecom business.
Recent metrics suggest, “The global 5G infrastructure market size is projected to reach USD 80.06 billion by the end of 2027.” With these recent strategic moves, AT&T has made it clear that it wants to large slice of the 5G market and the telecom space.
Thus, T stock could be a solid play for 2022. However, it will likely take several weeks, if not months, before AT&T shares stabilize and start a new leg up. Let’s take a closer look…
Recent Quarterly Results
AT&T’s third quarter financial results, reported on Oct. 21, beat analysts’ expectations thanks to ongoing customer growth in wireless, fiber, and HBO Max businesses. However, revenues of $39.9 billion implied a drop of 5.7% year-over-year (YOY) from $42.3 billion in the prior-year period. The decline was mainly due to the separation of the U.S. Video business, and lower revenue in Business Wireline.
Net income came in at $5.9 billion, or 82 cents per diluted share. In the year-ago quarter net income was $2.8 billion, or 39 cents per diluted share. Free cash flow ended the quarter at $5.2 billion, and net debt decreased by $10.0 billion sequentially. Net debt-to-adjusted EBITDA at the end of Q3 was 3.17x.
On the results, CEO John Stankey said, “We had our best postpaid phone net add quarter in more than 10 years, our fiber broadband net adds increased sequentially,” and added, “We also have clear line of sight on reaching the halfway mark by the end of the year of our $6 billion cost-savings goal.”
Management anticipates reaching 70-73 million HBO Max/HBO global subscribers by year-end. Free cash flow target of $26 billion also seems to be on track.
Adding T Stock to Portfolios
AT&T shares trade at 1.00 times trailing sales and 1.05x book value. Its consensus forward price-to-earnings (P/E) ratio currently stands at 7.42x. The metrics clearly that AT&T is currently undervalued. By comparison, its peers, such as Comcast (NASDAQ:CMCSA), Lumen Technologies (NYSE:LUMN) and Verizon Communications (NYSE:VZ) trade at 2.48x, 1.22x, and 2.73x book value, respectively.
Meanwhile, among 29 analysts polled, T stock has a “hold” rating. Also, the consensus is for a 12-month median price target of $31, implying about 28% upside potential. Currently, the 12-month price range stands between $23 and $37.
Despite management’s transition attempts to create positive momentum in terms of growth, these efforts have not translated into strong metrics, yet. AT&T’s plans should likey work, but creating shareholder value will need time. However, those investors who are not worried about daily swings in price could consider buying T stock now.
Alternatively, interested readers could also consider an exchange-traded fund (ETF) that provides exposure to T stock as a holding. Examples include the First Trust Morningstar Dividend Leaders Index Fund (NYSEARCA:FDL), the Global Beta Low Beta ETF (NYSEARCA:GBLO), the iShares MSCI USA Value Factor ETF (BATS:VLUE), and the SPDR S&P 500 ETF Trust (NYSEARCA:SPY).
The Bottom Line on AT&T Stock
AT&T, a dividend aristocrat, currently offers a dividend yield of 8.6%. However, this juicy yield might not last long. By the time the final spinoff closes, the dividend will understandably decline. InvestorPlace.com contributor Mark R. Hake, CFA, has recently published a comprehensive overview of what to expect from T stock in terms of future dividends.
On the other hand, the cash provided by the two spinoffs will help AT&T reduce its debt by roughly one-third. As a result, management will have more cash available for core telecom investments. In the long haul, patient shareholders of T stock and its spin-off companies will likely be rewarded.
On the date of publication, Tezcan Gecgil did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Tezcan Gecgil, Ph.D., has worked in investment management for over two decades in the U.S. and U.K. In addition to formal higher education in the field, she has also completed all three levels of the Chartered Market Technician (CMT) examination. Her passion is for options trading based on technical analysis of fundamentally strong companies. She especially enjoys setting up weekly covered calls for income generation.