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Call on AT&T for Strength in a Recession
03/17/2020 5:00 am EST
AT&T provides mobile, broadband and video to 100 million U.S. consumers and 3 million businesses). It also owns WarnerMedia (including Turner, HBO and Warner Bros.); AT&T Latin America (offering pay-TV and wireless service to 11 countries); and Xandr (providing advertising).
AT&T’s primary competitive advantage is its scale. It is all-but-impossible for a new telecom company to build a network with the necessary scale to compete with the established industry giants. This gives AT&T a wide economic moat and a durable competitive advantage.
During the last recession AT&T posted annual earnings-per-share results of $2.76, $2.16, $2.12 and $2.29 for 2007 through 2010. The company remained highly profitable each year of the recession but experienced a minor dip in earnings-per-share in 2009.
AT&T’s major growth catalyst going forward is media content, driven by the $81 billion acquisition of Time Warner, which owns multiple media brands, including: TNT, TBS, CNN, and HBO.
For 2020 the company expects revenue growth of 1% to 2%, and adjusted EPS of $3.60 to $3.70. By 2022, AT&T expects 1% to 2% annual revenue growth, along with $4.50 to $4.80 in earnings-per-share and a manageable debt-to-EBITDA ratio of 2.0x to 2.25x.
AT&T expects to generate earnings-per-share of $3.65 in fiscal 2020. Based on this, the stock has a price-to-earnings ratio of 10.2x.
Our fair value estimate for AT&T is a price-to-earnings ratio of 12.0, which means valuation expansion could boost future shareholder returns by approximately 3.3% per year over the next five years. Including the 5.6% dividend yield and 4% expected annual earnings-per-share growth, expected returns could reach 12.9% over the next five years.
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