The broader averages traded sharply higher on Jan. 30, after the Fed held rates constant, retreated from its formerly hawkish tone, and debated ending its balance sheet run-off. But, while stocks pretty much everywhere rallied in response, one stock that didn’t join the rally was AT&T (NYSE:T). It wasn’t a great day for AT&T stock.
Earlier in the day, the telecom giant reported disappointing fourth quarter numbers that included a wide revenue miss, an unimpressive earnings meet, and a conservative fiscal 2019 guide. AT&T dropped 4% in response.
For some investors, the ugly quarter is a sign to stay away. The wire-line business continues to suffer from negative revenue growth and compressing margins.
Meanwhile, the once hot wireless business is cooling, and customer churn is at a multi-year high. Earnings growth is muted, the balance sheet is dangerously levered, and the path forward lacks visibility.
But, that thesis fails to incorporate perhaps the most important element of AT&T stock: valuation.
At current levels, the valuation of AT&T stock more than fully prices in all those negatives. What it doesn’t incorporate, however, is any upside from stabilization in the wire-line business and improvement in the wireless business. That is exactly what will happen in 2019, thanks to Time Warner incorporation and the roll-out of 5G coverage.
As such, this isn’t the time to run away from AT&T stock. Instead, it’s time to buy the dip.
The Numbers Aren’t Great
There’s no way of hiding the truth. The numbers underlying AT&T stock currently are quite poor.
In the fourth quarter, revenues on a comparable pro forma basis including Time Warner dropped 1.4%. Every segment outside of wireless and WarnerMedia reported negative revenue growth in Q4.
Moreover, the growth from those two businesses wasn’t all that impressive. Wireless revenues rose less than 3%. WarnerMedia revenues rose about 6%.
The same is true on the adjusted EBITDA front. All other businesses outside of the wireless business and WarnerMedia reported negative EBITDA growth in Q4, and EBITDA growth from those two businesses wasn’t anything to write home about.
Perhaps most worrisome, the wireless business is showing signs of slowing. Net customer additions were 2.8 million in the quarter, consistent with what they were in the year ago quarter despite a bigger base (so smaller percent growth).
Branded, postpaid, and prepaid phone net adds were significantly weaker than they were in the year ago quarter. Postpaid and branded churn also hit a multi-year higher amid less promotional activity and with more expensive plans in focus.
Overall, the quarter was more of the same, and that isn’t a good thing. The company’s various wire-line businesses continue to fall at a steady pace, and the wireless business, while still growing, is starting to slow. That combination does not imply healthy growth going forward.
The Numbers Will Get Better
The core of the bull thesis on AT&T stock is that the numbers are ugly today, but they will get significantly better in 2019 and 2020 due to two huge catalysts.
On the wire-line side of things, AT&T integrating Time Warner’s assets more cohesively and comprehensively throughout AT&T’s services should stop subscriber loss, and perhaps even reinvigorate growth through robust streaming additions.
AT&T has been killed by the cord-cutting trend. The company has tried to pivot into the streaming world, and they have done so successfully with DirecTV Now. But, DirecTV Now growth hasn’t been enough to stop the bleeding elsewhere.
That could change in 2019. Thanks to the Time Warner acquisition, AT&T now also owns HBO Now. Plus, they own all the content that was within the Time Warner wheelhouse, which is a fairly robust suite of movies, shows, and channels.
AT&T can package all these assets together into a new streaming service, or incorporate them more seamlessly throughout the company’s existing streaming services, to boost streaming subscriber growth.
This will happen in 2019. As it does, streaming growth will offset cord cutting losses, and AT&T’s entertainment numbers should stabilize.
On the wireless side, 5G deployment over the next two years should reinvigorate growth and mitigate churn. Specifically, 2018 was the trial phase for 5G, 2019 will be the year of mass deployment, and 2020 will be the year when 5G becomes the nationwide standard.
Thus, over the next two years, 5G will go from nascent and little-used, to the national standard for wireless coverage. As this transition plays out, AT&T’s wireless business should re-accelerate in its growth trajectory.
Overall, over the next two years, AT&T’s numbers will get better. Robust streaming growth thanks to Time Warner content assets will help offset cord cutting headwinds, while 5G deployment will reinvigorate growth in the wireless business. That combination will help lift AT&T’s numbers, and AT&T stock.
The Valuation Is Very Attractive
At current levels, AT&T is at a long term valuation low which implies huge upside over the next several years.
Specifically, the stock is trading with a decade-high dividend yield of 6.8% and a decade-low forward earnings multiple of 5.5. AT&T stock has seen similar valuation combinations two times before. Once was in 2003, in the aftermath of the Dot Com Bubble bursting.
The other time was in 2009, in the aftermath of the financial crisis.
Both times, when AT&T hit these valuation levels, it bottomed and proceeded to stage a huge multi-year turnaround. Given the aforementioned fundamental catalysts, it is quite likely we get a similar turnaround in AT&T this time around.
Bottom Line on AT&T Stock
AT&T stock is a really beaten up, really cheap stock that simply needs one catalyst to spark a big rally. In 2019-20, you will get two catalysts, the combination of which could realistically send the stock towards $40.
That rally may not happen right away. But, in the meantime, investors are getting paid 7% to wait. As such, with downside limited here and potential upside huge, now seems like as good a time as any to buy AT&T stock.
As of this writing, Luke Lango was long T.
