AT&T ($T) — 3Q20 Update (10/31/20)

Remember where we left off with this stock — the current narrative is that AT&T is doomed, the DIRECTV business is a failure, and the cable-based businesses (i.e. Time Warner) are doomed in the new streaming world…

This wasn’t the read I got when looking at the past few quarters of earnings results…

In the quarter, revenue fell 5% to $42bn and EPS fell 19% to $0.76 per share. On the surface, EBITDA has been declining for the past 5 quarters. The headlines tell you Entertainment (where DIRECTV resides) is the big drag but this is misleading as that division is less than 15-20% of total EBITDA. Time Warner is hurting with heavy declines lately but a lot of this is understandable given the impact of COVID on advertising markets (sports in particular). That and the expensive HBO Max rollout. I expect Time Warner will level out from here.

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Debt is coming down…

Net debt is $149bn and leverage sits at 2.7x…

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Asset sales — I’ve said it before and I’ll reiterate it again, there are assets within this business that you don’t even realize… In my last post I mentioned the possibility of DIRECTV, Xandr, and Crunchyroll all being shopped for sale at a rumored $22bn+ in proceeds.

Beyond those assets, ATT expects to sell another $3bn prior to yearend.

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Management guided to $26bn in free cash flow for 2020 and they’ve already hit the $20bn mark. That’s another $6bn or so in Q4. Tack on the expected $3bn in asset sale proceeds and you have $9bn in Q4 cash inflows. Back out the $3.8bn for dividend payments and this leaves you $5bn or so toward debt repayment.

So now we’re heading into 2021 with roughly $145bn in net debt and free cash flow likely somewhere between $23-25bn (6x debt to FCF). As a reference point, Verizon has 5.3x debt to FCF.

HBO

One concern was around HBO (an important asset to this business)… As they rolled out HBO Max, they’ve also bumped the costs of this division pretty heavily — Q3 revenue fell 2% while EBITDA fell 92% in part to a huge jump in costs:

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Subscriber metrics…

There are 4 main areas of subscribers here — mobile, television, broadband, and voice

  • Mobile — Added 1m postpaid subs in Q3
  • Television — Two categories: Premium TV and AT&T TV Now. The former is what once was DIRECTV.
    • Premium TV lost 590k subs
    • TV Now lost 37k subs
  • Broadband — Added 158k subs across fiber, non-fiber, and DSL
  • Voice — Lost ~1m subs as this business continues to decline

Valuation

I hate to keep coming back to dividend yield as a valuation metric but for a select few stocks, it has such a good long running history… It also ignores any one-time charges, periods of negative earnings, swings in EV, etc..

Here’s a picture of mean reversion hard at work:

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At the 5-year average yield of 5.7% = $36.50 share price

At a 6% yield = $33 share price

Verizon has been below the 5% mark for years now as cash flow has been rebounding… Their FCF amounts to ~$20bn per year and leverage is somewhat similar to ATT at 5.3x debt/FCF.

This is just a matter of time before the narrative changes from “DIRECTV subs declining at a rapid rate” to “debt is low and asset sales helping while the dividend is safe”

Another quarter of similar results and investors might start thinking: “shit, this balance sheet is in decent shape and that dividend isn’t going anywhere.”