Independent market research for the future investor.

(Michael Li, Shalin Kothari)

Background: 
AT&T is a US conglomerate based in Dallas, Texas. The company holds large market shares in the US telecoms, TV, mobile, telephone and media service markets. Like many companies, the concerns that have arisen from Covid-19 have introduced an uncertainty among investors, resulting in a downturn in performance across all divisions. Investors have one eye on US coronavirus cases and the gradual lifting of lockdown regulations which is why stock prices have seen a slight increase since the lows around mid-March. Warner Media of AT&T recently launched their new streaming service “HBO Max” in response to competition from Disney and Netflix although this hasn’t quite delivered on expectations. But recent announcements offer encouraging signs for both consumers and investors. AT&T recently released information on the implementation of their 5G network (AT&T, 2020), improving networks and technologies across the world to increase potential for consumers and businesses. This is expected to reflect in higher revenues and profits for the coming future, and thus opens a window of opportunity for investors. 

AT&T, Inc.	2016	2017	2018	2019	Latest
Price/Sales	1.61	1.50	1.14	1.59	1.22
Price/Earnings	18.15	18.78	5.38	20.57	18.13
Price/Free Cash Flow	15.27	15.29	9.40	9.90	8.27
Price/Book	2.12	1.91	1.13	1.54	1.19
Return on Equity %	10.53	23.10	11.56	7.55	6.62
Earnings Yield %	5.51	5.32	10.06	4.86	5.51
Enterprise Value ($Bn)	382.23	354.67	383.02	455.05	380.27
EBITDA ($Bn)	49.39	44.36	58.30	65.76	53.40
Enterprise Value/EBITDA	7.74	8.00	6.57	6.91	7.12

Verizon Communications, Inc.	2016	2017	2018	2019	Latest
Price/Sales	1.71	1.75	1.74	1.94	1.81
Price/Earnings	15.53	13.66	7.03	13.20	12.33
Price/Free Cash Flow	19.65	74.90	15.28	14.53	11.13
Price/Book	10.65	8.10	4.19	4.13	3.75
Return on Equity %	67.46	106.6	30.62	33.69	31.93
Earnings Yield %	6.44	7.32	14.22	7.57	8.11
Enterprise Value ($Bn)	320.34	331.97	340.37	361.45	343.49
EBITDA ($Bn)	41.29	42.28	41.86	44.15	43.48
Enterprise Value/EBITDA	7.76	7.85	8.13	8.20	7.90

Overview: 

AT&T are trading at $30.01 as of 15^th August 2020, slowly rebounding from the $26.77 per share witnessed during March, the lowest since late 2010. 

Having peaked at almost $40 four months prior in November, there is an argument to be made that AT&T has significant potential in the near future. Revenues actually decreased from the first to second quarters of this year (macrotrends, 2020) but that does not seem to prevent AT&T investing as they continue to improve their future prospects. AT&T leads the way in rolling out its 5G network which is soon believed to revolutionise the technological landscape. It continues to maintain its dividend payments whilst slowly reducing long-term debts, a promising sign for investors. The success of this 5G operation dictates the returns for investors as this will influence the whole firm’s performance. AT&T’s network now covers more than 160 million people in the US, this accessibility gives them a competitive advantage over rivals like Verizon. 

“With AT&T 5G reaching nationwide, our network is beginning the journey to transform connectivity as we know it by setting a new bar of breath -taking experiences and improved efficiency. Businesses, developers and consumers are already tapping into 5G’s potential and we’re thrilled for customers across the U.S. to experience it for themselves. It’s an exciting time in technology.” 

-Jeff McElfresh, CEO of AT&T Communications. (Financial Times, 2020) 

Analysis: 

The price/earnings ratio (P/E) is a key financial ratio that allows analysts to compare similar firms within the industry to determine whether the firm is over or undervalued. AT&T’s P/E ratio has been consistently around the 18 to 20 mark over the last 5 years. Looking at Verizon, a similar company with a large stake in US telecommunications, we can see that their P/E ratios over the last 5 years are slightly lower at around the 12-15 level. This initially suggests that AT&T is slightly more overvalued against Verizon as investors have to pay more for the same return on investment. However, to get a more holistic outlook on the relative valuation on AT&T, it is important to compare the figures to the industry as a whole, we find that the US Telecom industry’s average P/E is 13.1. This gives us additional evidence and a stronger foundation to suggest AT&T is slightly overvalued based on P/E analysis.  

Next, we will look at the price/book (P/B) ratio of AT&T compared to Verizon and the wider US telecoms industry. Comparing the figures, we see that the recent ratios for AT&T, Verizon and the wider industry are 1.19, 3.75 and 1.5 respectively. This offers a much more positive outlook for investors as it indicates company undervaluation based on tangible assets. Furthermore, historical data suggests that the figures for AT&T have been consistently low over the past 5 years compared to the Verizon data, which was considerably higher, albeit falling steadily. The consistency seen with AT&T’s data indicates stability and excellent management within the company which makes the entity more appealing. 

Finally, we look at AT&T’s financial health and future projections. Short term company assets stand at $56.6B whilst short and long-term liabilities stand at $69.5B and $285.0B respectively. This indicates to investors a potentially troublesome financial situation as company growth is heavily contingent of liabilities, especially in the long run. Although long term assets are also predicted to grow, this is uncertain whereas liabilities are unavoidable; investors should take note of this and consider the risk of a sudden shock within the market. Looking at forecast annual revenue growth, the figures presented by analysts suggest that the company growth (0.5%) falls below both industry (1.5%) and market (9.5%) forecasts. While strong market rebounds may be on the horizon, it seems like the telecoms industry is relatively stagnant. Whilst the industry is still projected to grow, there are other markets with more short-term potential. 

DCF analysis 

Below is a DCF model that we have composed for AT&T based on modest assumptions of 3% growth and other consistent rates of tax, D&A and discount rates. We feel that a constant 3% growth rate is more than reasonable as AT&T’s forecasted annual earnings growth is at 12.9% (Simply Wall ST, 2020) for the next year given the recent economic turmoil. Since the model relies on heavy future projections, which may be unreliable, we have decided to produce a modest model as recent uncertainties loom over like never before as global relations are frail. Over-optimistic predictions inflate investor expectations which in this current climate is unrealistic. 

The final enterprise value is heavily dependent on the assumptions made, in particular the discount rate which is used to calculate the present value of future cash flows. The discount rate uses the interest rate to do this, as we know the further into the future we go, the less valuable these cash flows become, hence the present value of future cash flows is always lower than the unlevered free cash flows as shown in the model. The discount rate also often encompasses the WACC or weighted average cost of capital which refers to the cost of debt and equity which a firm uses to fund their projects. Therefore, the discount rate may easily change depending on the weighting of debt and equity, so the enterprise value may fluctuate significantly. Furthermore, the EBITDA multiple has significant influence on the final enterprise value, as we can see from AT&T’s numbers, this multiple decreased by almost 1.5x from 2017 to 2018, which would massively change the enterprise value, therefore the valuation we arrive at cannot be used alone. Firms typically use multiple valuation methods to evaluate future prospects, meaning a DCF alone only reveals part of the story for investors. 

Conclusion: 

Recommendation: Buy 

If the investor is persistent on the US telecoms industry, then we believe AT&T will be the firm to choose. The reason for this is simple: 5G. As of 23^rd July 2020 AT&T advanced on 5G technology for its consumers and currently over 160 million people and over 300 markets in the US. 5G technology has been one of key areas of tension between China and the USA, highlighting the importance of technology, which can boast speeds up to 20 times 4G technology. In the technologies industry, it is imperative to innovate first and deliver high quality, accessible services. AT&T have achieved this by beating fellow US competitor Verizon in making its 5G network available nationwide to both business and consumers; despite minor disruptions caused by Covid-19.  

Furthermore, the intense scrutiny of Huawei’s business model and ethics further emphasise the need for American firms to turn against globalisation and focus on domestic investment and innovation. Trump has made this one of his key promises since 2016 and will likely scrutinise on this further in an attempt to isolate themselves from China. This desire will result in additional federal support for technology and telecom giants, pointing towards a bright future for the industry. Countries that adopt these technologies earlier will soon be at an advantage. 

All in all, it is an optimistic time for AT&T as recent rebounds from previous crises plus data trends suggests strong market growth ahead making it a certain buy within the telecoms industry. 

Bibliography 

AT&T, 2020. AT&T 5G Launches in 28 New Markets, Including the First with Dynamic Spectrum Sharing (DSS) Technology. [Online]  
Available at: https://about.att.com/newsroom/2020/5g_announcements.html 
[Accessed 15 August 2020]. 

Financial Times, 2020. Company Announcements. AT&T 5G. Today Nationwide. [Online]  
Available at: https://markets.ft.com/data/announce/detail?dockey=600-202007230930PR_NEWS_USPRX____DA71521-1 
[Accessed 15 August 2020]. 

Investopedia, 2020. Definitions. [Online]  
Available at: https://www.investopedia.com/ 
[Accessed 15 August 2020]. 

macrotrends, 2020. AT&T Revenue 2006-2020 | T. [Online]  
Available at: https://www.macrotrends.net/stocks/charts/T/at-t/revenue 
[Accessed 15 August 2020]. 

Simply Wall ST, 2020. AT&T. [Online]  
Available at: https://simplywall.st/stocks/us/telecom/nyse-t/att 
[Accessed 15 August 2020].