AT&T's (NYSE:T) Risk/Reward Outlook is Starting to Look Attractive

AT&T Inc. ( NYSE:T ) was a rare outperformer last week after Morgan Stanley analyst Simon Flannery upgraded his rating on the stock from ‘equal-weight’ to overweight. The stock gained 6.95% on Thursday, its biggest one day gain in months - although the stock price is still down nearly 20% for the year. Flannery said price weakness had created an opportunity and upgraded his rating, though he lowered the price target from $32 to $28.

In October we mentioned that AT&T appeared undervalued but that uncertainty may continue to weigh on the price . This is still true, but there are some signs that we may be closer to a bottom.

We can summarise the key dynamics at AT&T as follows:

• AT&T has been a disappointment for investors over the last decade. Net income is below what it was in 2011 and the share price is back to 2009 levels. However, the lower share price means the dividend yield is now above 8%, and the company still has enough cash flow to cover this dividend.
• AT&T is set to merge its media asset WarnerMedia with Discovery ( Nasdaq:DISCA ) and then distribute shares in the new entity to shareholders. This deal is projected to be completed in the middle of 2022, and should result in value being unlocked for shareholders.
• After the deal is completed, AT&T will be a focussed telecommunications company with a focus on 5G. It has already made significant investments in this regard and these investments should begin to pay off in the next few years.
• The share price has been under pressure for the last year - potentially due to the lack of clarity over the value of the media spinoff, and how the company will deal with it’s very large debt load.

Low Valuation vs Uncertainty

AT&T comes with a uncertainty, but it’s also trading at a significant discount to our estimate of its fair value. This estimate is based on discounted cash flows- you can read more about the model here . AT&T's cash flows are actually more predictable than most companies, and the fair value estimate accounts for almost no growth - so this estimate is probably more quite conservative.

Looking Ahead:

Over the last few months analyst recommendations fr the stock have moved from neutral, to sector weight to overweight. AT&T isn’t out of the woods yet, but there are reasons to believe it may close to a bottom and the discount provides a margin of safety.

On the other side of the coin, there are two potential catalysts that could result in upside surprises. Firstly - investor interest in the company could increase as the unbundling of the media assets approaches (currently scheduled for mid 2022). And secondly, expectations for the telecom business are low and therefore have room to improve.

This article is not intended to be a comprehensive analysis on AT&T but to highlight the uncertainty vs. valuation trade off. If you are interested in understanding the company at a deeper level, take a look at AT&T’s company page on Simply Wall St  .

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Simply Wall St analyst Richard Bowman and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.