Time to Buy Telecom's Big Three

11/28/2019 5:00 am EST

Focus: TELECOM

Roger Conrad

Chief Analyst/Managing Partner, Capitalist Times

The third quarter 2019 results are in for AT&T (T), Comcast Corp. (CMCSA) and Verizon (VZ) and the key takeaway is that the "Big Three" of US communications are still building wealth and selling cheaply, asserts Roger Conrad, editor of Conrad's Utility Investor.

AT&T’s guidance featured a three-year strategic plan incorporating ideas from activist investor Elliott Management. We see three major conclusions from Elliott’s letter to AT&T CEO Randall Stephenson.

First, a very savvy player sees upside in AT&T. Second, the company realized Elliott wasn’t going away and had decided to work with them. And third, the trend for company earnings was up.

All three were affirmed with AT&T’s third quarter numbers and guidance. Under the plan, the company will separate the roles of chairman and CEO, cut debt to just 2 times cash flow, sell up to $10 billion in assets, swear off acquisitions, buy back 3 percent of its shares annually and continue low single digit dividend increases.

With shares trading at just 10.6 times expected 2019 full-year results and 8.3 times the mid-point of 2022 guidance, we’re comfortable raising our buy target to $40.

For Comcast, the greatest excitement has been overseas, where recently acquired Sky (8 percent of profit) boosted viewership 10 percent and lifted cash flow 38.3 percent from a year ago. That’s a very good sign for growing the unit’s 24 million customer relationships in Europe, driven by sports content.

In the US, Telemundo is still the number one Spanish language network, while NBC was tops for the 18 to 49 age group in prime time for the sixth consecutive year. That’s a solid testament to Comcast’s ability to run the content side of the business.

Success at the network is in no small part thanks to the powerful marriage of strong content with a superior network this decade. And those advantages will be showcased further over the next 12 months, as the company expands its Flex broadband offering and ramps up the Peacock streaming service.

With the stock trading at just 13.7 times expected 2019 full-year results, we’re now comfortable raising our highest recommended entry point for the king of cable to $45.

Compared with the rest of the Big Three, Verizon’s third quarter headline numbers were modest, with earnings increasing 2.5 percent on a 1.4 percent boost in revenue.

Below the surface, however, was a 10 percent increase in the pace of wireless customer additions, as the company rolled out 5-G service to 15 US cities as of the end of the quarter.

Verizon’s Fios offering followed the industry wide trend of losing pay television customers. But the company more than offset the impact on revenue (up 1.7 percent) with additions of broadband Internet users.

Rollout of 5-G remains Verizon’s most important focus. In the meantime, selling at just 12.2 times expected 2019 earnings, the shares scarcely reflect any promise. After these solid results and the modest 2.1 percent lift in this month’s dividend, we’re comfortable raising our highest recommended entry point for Verizon to 60.

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