$T analysis: Don’t Underestimate the cash flow

T is often talked about on this forum, but I haven’t seen an analysis of it. I have been watching it for some time, so I figured I’d do a quick write up. ​ Overview: There are 3 main businesses: wireless, broadband/wireline, and WarnerMedia. Their primary focuses are expanding 5G (which will also allow to sell hardware) and expanding fiber which aid their transition to be more software focused allowing them to lower costs and expand product portfolio. With write-downs and selling of non-core assets (DirectTV, Playdemic and Vrio) and spinning off WarnerMedia, they are focusing primarily on wireless and broadband services going forward. They are also doing substantial cost-cutting and streamlining efficiencies. ​ Valuation: At $23.46, they have a market cap of 167 billion. Their 2020 FCF was 27B, which is a Price to FCF ratio of 6. After Warner Spinoff they are projecting at least 20B in FCF which is a ratio of at least 8. They will be about 2.6x Debt to EBIDTA and given their P/B of about 1 now (likely less after merger), they will be able to almost immediately utilize value accretive buybacks with their substantial cash flow. Note: Earnings are depressed due to the previously mentioned asset write-downs. As they’ve already sold or wrote down most of their non-core assets, you should expect an immediate increase in earnings going forward. Based on previous dividend guidance when the Warner deal was announced. At current price, the dividend yield would be about 5%. However, after the spinoff, the price will likely drop further increasing the dividend yield, in exchange for a piece of WarnerDiscovery. ​ The Wildcard: The Spinoff The deal is sweetened when the spinoff is considered. Both WarnerMedia and Discovery generate impressive EBIDTA. The trailing annual EBIDTA for Warner Media is 8.6B. Discovery’s is 3.6B. Total trailing EBIDTA is 12.2. After merger, WarnerDiscovery will have 4.5x leverage, but plan to deleverage below 3x in less than half a year. At a very conservative multiple of 6x EBIDTA, the market cap of the new company could be 73B and each T share could be worth $7.26 of the new company. This could be higher or lower depending on market sentiment. ​ Risks: Management: John Stankey has been at AT&T since the early 2000s. He was previously in charge of WarnerMedia and we see where that went. The current plan of deleveraging and shrinking the business to focus more on core assets and capital allocation is a great idea. If they veer off this path, that will be a sign to jump ship. The spinoff: There are a lot of variables here. Though I believe Discovery will take much better care of WarnerMedia than T ever did. Also at the current stock price, it seems most people are ignoring the spinoff completely. I’m personally very bullish on the combined entity, but I can understand why others may not be. ​ Conclusion: T is a troubled company in the midst of a turnaround, but the stock price does not reflect the value of the business. The current and post-merger dividend are secure based on the dividend to FCF ratio and the current business strategy of focusing on core assets is the right move. Even if T doesn’t grow materially, the price to FCF ratio (post-merger) of 8, will allow them to pay out hefty dividends while shrinking share count. Significant upside is achieved if they can manage even low single digit rates of growth and if WarnerDiscovery is successful. I bought in a few days ago around $23.

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$T analysis: Don’t Underestimate the cash flow

bullish

general Analysis

[3 min Read]

T is often talked about on this forum, but I haven't seen an analysis of it. I have been watching it for some time, so I figured I'd do a quick write up.

Overview:

There are 3 main businesses: wireless, broadband/wireline, and WarnerMedia. Their primary focuses are expanding 5G (which will also allow to sell hardware) and expanding fiber which aid their transition to be more software focused allowing them to lower costs and expand product portfolio. With write-downs and selling of non-core assets (DirectTV, Playdemic and Vrio) and spinning off WarnerMedia, they are focusing primarily on wireless and broadband services going forward. They are also doing substantial cost-cutting and streamlining efficiencies.

Valuation:

At $23.46, they have a market cap of 167 billion. Their 2020 FCF was 27B, which is a Price to FCF ratio of 6. After Warner Spinoff they are projecting at least 20B in FCF which is a ratio of at least 8. They will be about 2.6x Debt to EBIDTA and given their P/B of about 1 now (likely less after merger), they will be able to almost immediately utilize value accretive buybacks with their substantial cash flow.

Note: Earnings are depressed due to the previously mentioned asset write-downs. As they've already sold or wrote down most of their non-core assets, you should expect an immediate increase in earnings going forward.

Based on previous dividend guidance when the Warner deal was announced. At current price, the dividend yield would be about 5%. However, after the spinoff, the price will likely drop further increasing the dividend yield, in exchange for a piece of WarnerDiscovery.

The Wildcard: The Spinoff

The deal is sweetened when the spinoff is considered. Both WarnerMedia and Discovery generate impressive EBIDTA. The trailing annual EBIDTA for Warner Media is 8.6B. Discovery's is 3.6B. Total trailing EBIDTA is 12.2. After merger, WarnerDiscovery will have 4.5x leverage, but plan to deleverage below 3x in less than half a year. At a very conservative multiple of 6x EBIDTA, the market cap of the new company could be 73B and each T share could be worth $7.26 of the new company. This could be higher or lower depending on market sentiment.

Risks:

Management: John Stankey has been at AT&T since the early 2000s. He was previously in charge of WarnerMedia and we see where that went. The current plan of deleveraging and shrinking the business to focus more on core assets and capital allocation is a great idea. If they veer off this path, that will be a sign to jump ship.

The spinoff: There are a lot of variables here. Though I believe Discovery will take much better care of WarnerMedia than T ever did. Also at the current stock price, it seems most people are ignoring the spinoff completely. I'm personally very bullish on the combined entity, but I can understand why others may not be.

Conclusion:

T is a troubled company in the midst of a turnaround, but the stock price does not reflect the value of the business. The current and post-merger dividend are secure based on the dividend to FCF ratio and the current business strategy of focusing on core assets is the right move. Even if T doesn't grow materially, the price to FCF ratio (post-merger) of 8, will allow them to pay out hefty dividends while shrinking share count. Significant upside is achieved if they can manage even low single digit rates of growth and if WarnerDiscovery is successful. I bought in a few days ago around $23.

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T

AT&T Inc.

20.93

-0.03
-0.14%

Return

-10.78%
Change % Since Posting
-2.53
Change Since Posting
23.46
Price When Posted

Metrics

30.00
Target Price
9/ 10
Confidence
2-6 Months
Timeframe
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