AT&T’s 5G investing has us optimistic for the long-term growth of the company.
AT&T T released its first-quarter earnings report on April 20. Here’s Morningstar’s take on how investors should view AT&T’s earnings, the company’s long-term outlook, and the stock.
We think AT&T’s first quarter was broadly in line with expectations, with two major areas causing debate among investors:
Overall, a single quarter doesn’t usually provide a ton of insight into the long-term prospects for telecom or cable firms. We think AT&T continues to say the right things. It is investing aggressively in 5G wireless network capacity and expansion of its fiber network. About 55% of the firm’s residential broadband customer base is on its fiber network, up from 45% a year ago. Wireless churn metrics indicate customers are generally happy with the quality of its wireless network. We think both network initiatives provide support for long-term customer relationships that will drive steady, albeit modest, revenue growth over the long term. As network projects wrap up, cash flow should increase as well.
At a 4-star rating, we believe AT&T stock is undervalued when compared with our fair value estimate.
Our $25 fair value estimate assumes that AT&T will deliver modest revenue growth and gradually expanding margins over the next several years as its wireless and fiber network investments pay off. Our fair value estimate implies an enterprise value of 8.0 times our 2023 EBITDA estimate and a 7% free cash flow yield. In wireless, we expect AT&T will slowly gain market share over the next few years, though the near term could prove bumpy as the cable companies continue working to establish their wireless businesses. We expect the consumer broadband business will deliver steadily improving growth as the fiber network buildout matures. We expect the enterprise services business will gradually return to growth in the coming years with profitability holding steady as cost-cutting balances the loss of higher-margin legacy services. AT&T hasn’t provided much detail surrounding the enterprise business, making it more difficult to forecast future results. In total, we believe consolidated revenue can grow 2%-3% annually over the next five years.
Read more about AT&T’s fair value estimate.
Wireless is AT&T’s most important business. Returns on capital in wireless have eroded somewhat in recent years as the firm has spent heavily on wireless spectrum and invested to put that spectrum to use. We expect that wireless returns will remain ahead of AT&T’s cost of capital. Verizon, AT&T, and T-Mobile dominate the U.S. wireless market, collectively claiming nearly 90% of retail postpaid and prepaid phone customers between them and supplying the network capacity to support most other players. Each of the three major carriers has pledged substantial capital returns to shareholders: AT&T’s new dividend totals $8 billion annually and Verizon’s nearly $11 billion, while T-Mobile has said it can repurchase up to $60 billion of its shares through 2025. AT&T is one of only a handful of companies capable of providing complex communications services to business customers with geographically diverse needs. AT&T’s last significant business, consumer fixed-line services, doesn’t possess a moat, in our view. We estimate AT&T’s consumer fixed-line networks reach around 55 million homes, or a bit less than half of the U.S. population.
Read more about AT&T’s moat rating.
We have changed our Morningstar Uncertainty Rating to Medium from High to better reflect the volatility we expect AT&T investors will face relative to our global coverage. Regulation and technological change are the primary uncertainties facing AT&T. Regulators also control the flow of wireless spectrum into the industry, which has created scarcity in the past, pushing carriers to pay high prices for licenses. On the technology front, wireless standards continue to evolve, putting more spectrum to use more efficiently. While unlikely, in our view, wireless technology could also remove the need for AT&T’s fixed-line networks, killing returns on its fiber investments.
Read more about AT&T’s risk and uncertainty.
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The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.
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