Morningstar

AT&T Posts Another Solid Quarter of Earnings as Revenue Per Customer Climbed

Maintaining $25 fair value estimate; stock significantly undervalued.

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AT&T Inc
(T)

AT&T (T) third-quarter results lend support to our view that the firm is poised to deliver steadily improving performance in the coming years. While wireless customer additions slowed, revenue per customer spiked higher, exceeding our expectations. The firm expects to meet or exceed financial targets for the year, including generating $14 billion of free cash flow. While AT&T has clearly backed away from the 2023 free cash flow target of $20 billion set following the Warner spinoff, management expects this metric to grow next year, which we believe to be very reasonable and provides comfort around the dividend. We are maintaining our $25 fair value estimate, and we think the stock is significantly undervalued.

Adjusted for business dispositions, total revenue increased 3.1% year over year on solid results across all segments. Wireless service revenue (about half of total firm sales) increased 5.6%, the best result in a decade. AT&T added 708,000 postpaid phone customers during the quarter, down from 928,000 a year ago. The firm continues to do a great job of attracting new customers but the pace of those leaving picked up slightly: monthly postpaid phone churn was 0.84%, up from 0.72% last year. AT&T has pushed some customers away with select price increases, but churn remains below prepandemic levels. Also, average revenue per postpaid phone customer jumped 2.4% versus a year ago, far stronger than expected entering the year given the ac amortization of past promotional credits against revenue.

Wireless profitability remains solid. The segment generated a 41.7% EBITDA margin, down slightly from 41.9% a year ago. Management expects margins to begin improving as 3G network shutdown costs dissipate, investments to improve efficiency deliver results, and the benefits of increased sales drive operating leverage.

Consolidated free cash flow was flat versus a year ago at $3.8 billion despite a step up in capital investment to $6.8 billion from $5.5 billion.

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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About the Author

Michael Hodel, CFA

Sector Director
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Michael Hodel, CFA, is a sector director, AM Communication Services, for Morningstar*. He covers U.S. telecom service providers and related firms, including AT&T, Verizon, and Comcast. His team covers media companies, global telecom service providers, and owners of telecom infrastructure, such as wireless towers and data centers. The team’s research focuses on the role that evolving networking technologies, consumer habits, and industry structures play in shaping the competitive advantages and disadvantages facing firms under coverage.

Hodel joined Morningstar in 1998, initially serving within the equity data group, responsible for collecting financial information on thousands of firms. Prior to his current position, he spent two years as a portfolio manager for Morningstar Investment Management, LLC. Previously, he served as a technology strategist responsible for telecom research, chair of Morningstar’s Economic Moat Committee, and a senior member of Morningstar’s corporate credit ratings initiative.

Hodel holds a bachelor’s degree in finance, with highest honors, from the University of Illinois at Urbana-Champaign. He also holds a master’s degree in business administration from the University of Chicago Booth School of Business. He also holds the Chartered Financial Analyst® designation.

* Morningstar Research Services LLC (“Morningstar”) is a wholly owned subsidiary of Morningstar, Inc

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