AT&T Lays Out Optimistic 3-Year Plans

AT&T’s T announcement of three-year strategic and capital-allocation plans overshadowed third-quarter earnings that were broadly as we expected. Wireless results remained solid, with continued postpaid customer growth improvement and modest margin expansion, while the entertainment segment experienced sharp television customer losses but stable profitability. The general outline of AT&T’s three-year plans lines up with our expectations, with one major exception: Management believes the EBITDA margin can expand about 2 percentage points through 2022, which we view as optimistic, given the pressures facing several parts of the business. AT&T also plans to repurchase $30 billion of shares over three years, equal to more than half of expected free cash flow after dividend payments, while continuing to reduce debt leverage gradually. We were happy to hear management express sensitivity to the stock price, with plans to front-load repurchases to capitalize on the current share price.

We like the progress AT&T has made thus far in 2019, but we’re hesitant to radically change our longer-term thinking on the firm. The telecom and media landscapes are likely to change meaningfully in the coming years, forcing AT&T to adjust along the way. While we suspect the firm is capable of expanding margins in the near term, we aren’t convinced that doing so will prove to be in its long-term best interest. While the firm has incorporated HBO Max into its projections, maintaining solid competitive positions in wireless and media could require unplanned investments. In addition, future asset sales or restructurings are likely to complicate the picture over the next couple of years. We don’t expect to materially change our $37 fair value estimate, and we view narrow-moat AT&T's shares as fairly valued.

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