The spin-off of the media division for AT&T (NYSE:T) seems to have come at the right time for investors bullish on the pure-play communications segment. As, without doubt, the big morning news is that Netflix (NASDAQ:NFLX) stock has plummeted after the loss of 200,000 subscribers. T stock has remained firm even as Warner Bros. Discovery (NASDAQ:WBD) has declined by over 6% in early morning trade due to negative industry sentiments.
So, let’s bring it back to AT&T. What’s next for the now pure-play in the communications and mobility division?
I believe that T stock is undervalued and is poised for a rally in the coming quarters. Let’s talk about the positive catalysts.
Positive Business Catalysts
The first point to note is that AT&T has received more than $40 billion in cash from the spin-off transaction. In the past, the debt burden has been a key headwind T stock. The cash buffer will allow AT&T to deleverage. The company has guided for net-debt of 2.3x by the end of 2023. A cleaner balance sheet will positively impact market sentiment for the stock.
For the fourth quarter of 2021, the company’s communication segment reported revenue of $30.2 billion. For the same period, the adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) was $10.6 billion. This would imply an annualized EBITDA potential of $40 billion. The communications segment is therefore positioned to deliver healthy cash flows.
For 2022, AT&T has provided a consolidation (pre-spin-off) guidance of $22 billion in free cash flows (FCF). With WarnerMedia’s FCF contribution estimated at $3 billion, the communications segment has robust FCF visibility. There is also a case for renewed upside in dividends once AT&T achieves its deleveraging target.
It’s also worth noting that AT&T’s post-paid phone and fiber subscribers have been trending higher. Between 2016 and 2020, AT&T has invested more than $105 billion into its wireless and wireline network. The investments are likely to yield results in the form of subscriber growth in the next few years.
Concluding Thoughts on T Stock
Raymond James analyst Frank Louthan reiterated his firm’s “Outperform” rating for T stock after the spin-off. The analyst believes that T stock is likely to see increased institutional investor interest. Frank has a price target of $26 for the stock. This would imply an upside potential of 34% from current levels of $19.40.
As a leaner organization, AT&T looks attractive. The company’s big investment into the mobility segment, specifically 5G investments, are likely to yield results in the form of higher cash flows.
Current levels seem attractive for exposure with potential upside of 30% to 40% in the next 12-18 months.
On the date of publication, Faisal Humayun did not hold (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.
