AT&T Earnings: Weak Cash Flow and Slower Customer Growth No Cause for Concern

AT&T Stock at a Glance

Current Morningstar Fair Value Estimate: $25.00

Stock Star Rating: 4 Stars

Uncertainty Rating: Medium

Economic Moat Rating: Narrow

AT&T Earnings Update

We suspect two things are weighing on AT&T T stock after the company released first-quarter results: weak free cash flow and slower wireless customer growth. We don’t believe either is a cause for concern, and we are maintaining our $25 fair value estimate on AT&T stock.

AT&T generated $1 billion of free cash flow, per management’s definition, down from $2.8 billion in the year-ago quarter and well short of the pace needed to hit management’s $16 billion expectation for the year. In our view, the underlying business performed well during the first quarter, with services revenue increasing 2.6% and margins expanding in the wireless and consumer broadband businesses.

However, a large repayment of payables and a modest uptick in capital spending hit cash flow. AT&T indicated last quarter that cash flow would be heavily weighted to the back half of 2023, which is normal for the firm, but the magnitude of the movement in working capital is unusual. Management remains resolute that working capital will even out over the course of the year and that it will hit or surpass its free cash flow target.

Net postpaid phone customer additions totaled 424,000 during the quarter, down from 691,000 a year ago and the slowest pace in nearly three years. Customer retention remains strong, with the rate of customer defections (churn) up very slightly versus a year ago. AT&T isn’t attracting new customers as quickly, likely reflecting a slowdown in industry growth, but we also suspect the firm is losing some ground to competitors, especially the cable companies.

After years of mismanagement of expectations around free cash flow, including a cut to management’s forecast last year, we understand investors’ skepticism. However, we believe investors should focus more on AT&T’s investments in its networks. We prefer the firm’s focus on building long-term customer relationships over offering deep service pricing discounts to attract accounts.