AT&T Meets Its Commitments, Sort Of

AT&T T entered 2019 with two major objectives: repay debt and stabilize the performance of the entertainment segment. With fourth-quarter results in, the firm has claimed victory on both fronts, but the truth is more complex in our view. Reported net debt declined to a hair above the 2.5 times EBITDA target the firm established a year ago, but this figure ignores preferred shares issued during the year. The entertainment business stabilized EBITDA as promised, but financial results weakened throughout the year and television customer losses remain troubling. Lost in the complexity, however, the wireless business and WarnerMedia continue to perform well, with the launch of HBO Max rapidly approaching. The strength of these two segments form the basis of our narrow moat rating on AT&T. In our view, the balance sheet is now in decent shape and the entertainment business will remain an unfortunate, but relatively small, sore spot for some time. We don’t expect to materially change our $37 fair value estimate, and we view AT&T shares as fairly valued.

AT&T added 229,000 net postpaid phone customers during the fourth quarter, its best performance in two years on continued growth in gross customer additions and roughly stable defections (churn). The strength of the postpaid market across the industry has come at the expense of the prepaid business, but AT&T has managed to grow its prepaid customer base, as well. Wireless pricing remains somewhat weak, with average revenue per postpaid phone customer failing to grow meaningfully during 2019 amid what management characterized as a heavily promotional fourth quarter. Total wireless service revenue increased 0.8%, in line with the prior quarter. With the solid customer momentum AT&T has seen recently, management expects growth will accelerate in 2020. The segment EBITDA margin was flat year over year during the quarter, which was modestly disappointing given record low phone upgrades.

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