Fiber Network Expansion And FirstNet Investments Will Improve Operational Efficiency

Key Takeaways

• Expansion in fiber networks and network modernization is expected to enhance revenue growth and margins by increasing the customer base.
  
• Cost reduction initiatives and increased converged service penetration are likely to improve operating margins and boost long-term revenue.
  
• Macroeconomic challenges and competitive pressures may impact AT&T's revenues, margins, and investor confidence due to increased costs, market competition, and execution risks.

Catalysts

Provides telecommunications and technology services worldwide.

• AT&T's significant expansion in fiber networks and network modernization investments is expected to enhance revenue growth and margins by increasing the customer base and improving infrastructure efficiency.
  
• The company's strategy to increase converged service penetration (fiber and wireless) is likely to boost lifetime customer value by over 15%, positively impacting long-term revenue and customer retention.
  
• Planned share repurchases by AT&T could enhance earnings per share (EPS) through reduced share count, assuming consistent or improved profitability.
  
• Cost reduction initiatives, including retiring legacy copper networks and optimizing digital channels, aim to improve operating margins and net income sustainably.
  
• Strategic investments in FirstNet and other advanced connectivity services are expected to drive Business Wireline revenue growth and support overall EBITDA growth amidst a challenging macro environment.

AT&T Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming AT&T's revenue will grow by 1.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 8.8% today to 13.1% in 3 years time.
• Analysts expect earnings to reach $16.7 billion (and earnings per share of $2.5) by about April 2028, up from $10.7 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 14.5x on those 2028 earnings, down from 18.0x today. This future PE is greater than the current PE for the US Telecom industry at 12.8x.
• Analysts expect the number of shares outstanding to grow by 0.11% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.21%, as per the Simply Wall St company report.

AT&T Future Earnings Per Share Growth

Risks

• The macroeconomic environment poses uncertainties, with policies aiming to create more equitable global trade and domestic manufacturing possibly increasing costs for devices and network equipment, which could impact revenues and margins.
  
• Increased competitive intensity in the wireless market could affect customer retention and acquisition, potentially impacting service revenues and net margins.
  
• Consumer behavior changes, such as prolonging device upgrade cycles due to potential tariff-induced price increases, could affect AT&T's earnings and revenue growth.
  
• The execution risks associated with the company's ambitious fiber expansion and legacy copper network retirement may lead to increased costs or delays, impacting earnings growth.
  
• Economic and industry uncertainties may affect the company's ability to deliver on its financial guidance and capital returns, thus impacting investor confidence in earnings forecasts.

Valuation

• The analysts have a consensus price target of $27.977 for AT&T based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $32.0, and the most bearish reporting a price target of just $17.8.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $127.6 billion, earnings will come to $16.7 billion, and it would be trading on a PE ratio of 14.5x, assuming you use a discount rate of 6.2%.
  
• Given the current share price of $26.96, the analyst price target of $27.98 is 3.6% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.