Finance

AT&T Stock Below Covid-Lows – Where Is It Headed?

We believe at less than $26 per share at the moment, AT&T stock (NYSE: T) looks undervalued. The stock is down almost 35% from the level of $39 seen in the beginning of 2020. It traded at $38 in February 2020 (just before the coronavirus pandemic) and it is currently still more than 33% below that level, as well. AT&T stock is, in fact, even below its March 2020 low of $27. The stock has significantly underperformed the market over the last one-and-a-half years because of a lackluster launch of its streaming offering – HBO Max, along with the acquisition of Warner Media not adding much to the top line in 2020 due to the pandemic severely hitting the movie and advertising revenues for media giants.

AT&T continues to face intense competition from Verizon
VZ
and T-Mobile in the 5G technology expansion, alongside Dish Network
DISH
which announced a partnership with Amazon’s
AMZN
AWS for 5G. While HBO Max is expected to gradually increase its subscriber base, it will face intense competition from bigger rivals like Netflix
NFLX
and Disney. Thus, we believe that AT&T stock is unlikely to go back to the pre-pandemic level any time soon, due to rising competition in streaming and 5G businesses.

However, a point worth noting is that the company’s video subscriber loss narrowed in Q2 2021 to 473,000. This is the least quarterly loss since Q4 2018. In order to focus more on 5G and its core telecom business along with deleveraging, the company is downsizing its entertainment business. This is evident from the sale of its Vrio business unit, which provides live and on-demand video services in Latin America, to an Argentina-based investment group. We believe that as the benefits of these measures start showing results in the coming quarters, the stock will likely see a strong uptick to settle close to $30. Our conclusion is based on our comparative analysis on the performance of AT&T stock during the 2008 recession vs now in our dashboard.

2020 Coronavirus Crisis

Timeline of 2020 Crisis So Far:

  • 12/12/2019: Coronavirus cases first reported in China
  • 1/31/2020: WHO declares a global health emergency.
  • 2/19/2020: Signs of effective containment in China and hopes of monetary easing by major central banks helps S&P 500 reach a record high
  • 3/23/2020: S&P 500 drops 34% from the peak level seen on Feb 19, 2020, as COVID-19 cases accelerate outside China. Doesn’t help that oil prices crash in mid-March amid Saudi-led price war
  • Since 3/24/2020: S&P 500 recovers 102% from the lows seen on Mar 23, 2020, with the Fed’s multi-billion dollar stimulus package keeping the economy afloat during the prolonged lockdown and the vaccination drive allowing things to gradually return to near-normal conditions despite several waves of Covid infections.

In contrast, here is how AT&T stock and the broader market fared during the 2007-08 crisis

Timeline of 2007-08 Crisis

  • 10/1/2007: Approximate pre-crisis peak in S&P 500 index
  • 9/1/2008 – 10/1/2008: Accelerated market decline corresponding to Lehman bankruptcy filing (9/15/08)
  • 3/1/2009: Approximate bottoming out of S&P 500 index
  • 12/31/2009: Initial recovery to levels before accelerated decline (around 9/1/2008)

AT&T and S&P 500 Performance Over 2007-08 Financial Crisis

AT&T stock declined from levels of about $42 in September 2007 (pre-crisis peak) to levels of $24 in March 2009 (as the markets bottomed out), implying AT&T stock lost 44% from its approximate pre-crisis peak. It recovered post the 2008 crisis, to levels of little over $28 in early 2010, rising by 18% between March 2009 and January 2010. In comparison, the S&P 500 Index saw a decline of 51% and recovered 48%.

AT&T Fundamentals Over Recent Years

AT&T revenues increased from $160.5 billion in 2017 to $171.8 billion in 2020, due to an increase in post-paid connections. Despite higher revenues, margins declined over recent years with EPS decreasing from $4.77 in 2017 to -$0.75 in 2020. Margins in 2020 were hit due to lower revenue (y-o-y), higher equipment costs, and high asset impairment.

Does AT&T Have Sufficient Cash Cushion To Meet Its Obligations Through The Coronavirus Crisis?

AT&T’s total debt decreased from $164.3 billion in 2017 to $157.2 billion in 2020, while its total cash went down from $50.5 billion to $9.7 billion over the same period. AT&T generated healthy cash from operation of $43 billion in the last twelve months. Though the debt level is quite high, a healthy cash from operations generation capacity over recent years provides the company a liquidity cushion to weather the current crisis.

Conclusion

Phases of Covid19 Crisis:

  • Early- to mid-March 2020: Fear of the coronavirus outbreak spreading rapidly translates into reality, with the number of cases accelerating globally
  • Late-March 2020 onward: Social distancing measures + lockdowns
  • April 2020: Fed stimulus suppresses near-term survival anxiety
  • May-September 2020: Recovery of demand, with the phased lifting of lockdowns – no panic anymore with number of cases appearing to have plateaued
  • October 2020-February 2021: Unprecedented surge in Covid cases forcing a fresh round of lockdowns across the nation
  • Since March 2021: Ongoing vaccination drive and gradual re-openings drive an improvement in demand – buoying market sentiment

Given the steady decline in the number of new Covid-19 cases in the U.S., we expect an improvement in demand to buoy market expectations. As investors focus their attention on expected 2021 results, we believe AT&T stock has the potential for strong gains once fears surrounding the Covid outbreak are put to rest.

 

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