Thematic evaluation
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AT&T, Inc. (T)

September 06, 2024

Compared to: Deutsche Telekom AG (DTE) | Verizon Communications, Inc. (VZ) | The Communication Services Select Sector SPDR Fund (XLC)

Our reasoning

AT&T appears undervalued based on its low P/E and EV/EBITDA ratios compared to industry averages, strong free cash flow generation, and potential growth from 5G and fiber network expansion. The current valuation seems to overemphasize risks such as declining revenue growth and high debt levels, while underappreciating the company's strong market position and growth prospects in key areas.

Key takeaways
  • AT&T is a leading provider of telecommunications services, with a focus on wireless, broadband, and business connectivity solutions. The company is navigating industry shifts towards 5G, fiber, and cloud-based technologies.
  • AT&T's profitability is increasing, driven by growth in higher-margin wireless service revenues and fiber revenues.
  • The company is effectively controlling its operating expenses, which is contributing to its improved profitability.
  • AT&T's liquidity position is strong, as evidenced by the strong operating cash flow and the decreasing short-term debt levels.
  • The company's solvency is improving, as evidenced by the decreasing debt levels and the increasing cash flow to total debt ratio.
  • AT&T's investment-led strategy is paying off, as evidenced by the strong growth in its 5G and fiber networks.
  • The company is focusing on organic growth, which is a more sustainable and predictable growth strategy.
  • AT&T's strong cash flow generation will allow it to continue to invest in growth opportunities and return capital to shareholders.
  • The company's financial flexibility will allow it to navigate potential economic downturns.
Undervalued
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Evaluation summary

  1. Company Overview:

    • AT&T, Inc. (T) is a leading provider of telecommunications and technology services globally, operating through two reportable segments: Communications and Latin America. The Communications segment provides wireless and wireline telecom and broadband services to consumers in the U.S. and businesses globally. Key business units include Mobility, Business Wireline, and Consumer Wireline. The Latin America segment focuses on wireless services and equipment in Mexico.
    • AT&T's key products and services include wireless voice/data services, broadband internet, IP-based business services, and traditional voice/data services. The company's target market includes consumers, businesses, and wholesale/resale subscribers. Key competitors include other national wireless providers, regional providers, cable companies, and internet-based service providers.
    • We are using The Communication Services Select Sector SPDR Fund (XLC) as a benchmark for AT&T's price performance and Verizon Communications, Inc. (VZ) and Deutsche Telekom AG (DTE) as industry peers for comparative analysis.

  2. Financial Performance:

    • AT&T's revenue has been declining in recent quarters, driven by declines in Business Wireline service revenue and low-margin mobility equipment revenues. However, the company is shifting towards higher-margin products, which is helping to offset the decline in revenue growth.
    • The company's profitability is increasing, driven by growth in higher-margin wireless service revenues and fiber revenues. AT&T is effectively controlling its operating expenses, which is contributing to its improved profitability.
    • AT&T's return on assets (ROA), return on equity (ROE), and return on invested capital (ROIC) have been improving in recent quarters, indicating that the company is becoming more efficient at generating revenue from its assets.
    • Compared to its peers, AT&T has generally outperformed Verizon in terms of profitability and ROA, but it has underperformed Deutsche Telekom.

  3. Operational Efficiency:

    • AT&T's working capital has been decreasing in recent quarters, indicating that the company is managing its short-term assets and liabilities more effectively.
    • The company is generating strong operating cash flow, which is a positive sign for its financial health. AT&T is investing heavily in its 5G and fiber networks, which is driving growth in its Mobility and Consumer Wireline segments.
    • AT&T's free cash flow has been increasing in recent quarters, and its free cash flow margin is also improving. This indicates that the company is generating more cash from its operations after accounting for capital expenditures.
    • AT&T's capital expenditures have been increasing in recent quarters, reflecting the company's investment in its 5G and fiber networks. However, the company's depreciation expense is also increasing, which is offsetting some of the impact of these investments on its cash flow.
    • AT&T's dividend payments have been stable in recent quarters, and the company has also been repurchasing shares. The company's strong cash flow generation will allow it to continue to invest in growth opportunities and return capital to shareholders.
    • Compared to its peers, AT&T has a higher current ratio and quick ratio, indicating that it has a stronger short-term liquidity position. However, AT&T's debt-to-equity ratio is higher than Verizon's, indicating that it has a higher level of leverage.

  4. Growth Opportunities:

    • AT&T is expanding its market reach by investing in its 5G and fiber networks. The company sees opportunities to expand AT&T Fiber both within and outside its existing footprint, including through capital-light arrangements with other fiber providers.
    • AT&T is pursuing a convergence strategy, leveraging its combined 5G and fiber assets to drive higher share and returns in both mobility and broadband.
    • The company is focusing on organic growth, which is a more sustainable and predictable growth strategy.
    • AT&T's management has a history of successfully executing its strategic plans, as evidenced by the company's strong growth in its 5G and fiber networks.

  5. Risks and Threats:

    • AT&T's revenue growth is decreasing, which could be a concern if it continues to decline.
    • The company's reliance on its 5G and fiber networks could be a risk if these technologies do not continue to grow in popularity.
    • AT&T's debt levels are still relatively high, which could be a concern if interest rates rise.
    • The company faces competition from other national wireless providers, regional providers, cable companies, and internet-based service providers.
    • The regulatory environment for the telecommunications industry is complex and subject to change, which could impact AT&T's operations and profitability.

  6. Valuation Analysis:

    • AT&T's valuation metrics, such as its price-to-earnings (P/E) ratio and enterprise value (EV) to EBITDA ratio, are currently in line with its peers.
    • The company's strong cash flow generation and its investment-led strategy are potential catalysts for future growth.

  7. Price Performance:

    • AT&T's stock price has been volatile in recent months, but it has generally outperformed its peers and the benchmark over the past three years.
    • AT&T's beta is lower than its peers, indicating that it is less sensitive to market movements.

  8. Future Outlook:

    • AT&T's management has reaffirmed its full-year guidance for adjusted EBITDA growth around 3% and adjusted EPS in the $2.15 to $2.25 range.
    • The company expects higher activity levels in the wireless business in the back half of the year, driven by new device launches and promotional cycles.
    • Analysts are generally optimistic about AT&T's future prospects, with many expecting the company to continue to grow its revenue and earnings in the coming years.

  9. Summary:

    • AT&T is a financially sound company with a strong track record of profitability and cash flow generation. The company is well-positioned for future growth, driven by its investment-led strategy and its focus on organic growth.
    • AT&T's key strengths include its strong brand recognition, its extensive network infrastructure, and its focus on innovation. However, the company faces challenges from declining revenue growth, high debt levels, and intense competition.
    • AT&T's valuation is currently in line with its peers, and the company's strong cash flow generation and its investment-led strategy are potential catalysts for future growth.
    • Overall, AT&T is a solid investment for investors seeking a company with a strong track record of profitability and a focus on growth. However, investors should be aware of the company's challenges, including its declining revenue growth and its high debt levels.
Peer fundamentals 
Fundamentals
Insights
  • AT&T is a leading provider of telecommunications services, with a focus on wireless, broadband, and business connectivity solutions. The company is navigating industry shifts towards 5G, fiber, and cloud-based technologies.
  • AT&T's profitability is increasing, driven by growth in higher-margin wireless service revenues and fiber revenues.
  • The company is effectively controlling its operating expenses, which is contributing to its improved profitability.
  • The company's liquidity position is strong, as evidenced by the strong operating cash flow and the decreasing short-term debt levels.
  • The company's solvency is improving, as evidenced by the decreasing debt levels and the increasing cash flow to total debt ratio.
  • The company's investment-led strategy is paying off, as evidenced by the strong growth in its 5G and fiber networks.
  • The company is focusing on organic growth, which is a more sustainable and predictable growth strategy.
  • The company's strong cash flow generation will allow it to continue to invest in growth opportunities and return capital to shareholders.
  • The company's financial flexibility will allow it to navigate potential economic downturns.
  • The company's revenue growth is decreasing, which could be a concern if it continues to decline.
  • The company's reliance on its 5G and fiber networks could be a risk if these technologies do not continue to grow in popularity.
  • The company's debt levels are still relatively high, which could be a concern if interest rates rise.
Analysis
  • Revenue - Revenue growth is decreasing, driven by declines in Business Wireline service revenue and low-margin mobility equipment revenues. - The company is shifting towards higher-margin products, which is helping to offset the decline in revenue growth. - The company's revenue growth is expected to moderate in the future.
    • Profitability
      • The company's profitability is increasing, driven by growth in higher-margin wireless service revenues and fiber revenues.
      • The company is effectively controlling its operating expenses, which is contributing to its improved profitability.
      • The company's profitability is expected to continue to increase in the future.
    • Liquidity
      • The company's liquidity position is strong, as evidenced by the strong operating cash flow and the decreasing short-term debt levels.
      • The company's ability to meet its short-term obligations is not a concern.
    • Solvency
      • The company's solvency is improving, as evidenced by the decreasing debt levels and the increasing cash flow to total debt ratio.
      • The company's ability to meet its long-term obligations is not a concern.
    • Operational Efficiency
      • The company's operational efficiency is improving, as evidenced by the decreasing cost of goods sold and the increasing return on assets and return on equity.
      • The company is becoming more efficient at generating revenue from its assets.
    • Cash Flow Analysis
      • The company is generating strong operating cash flow, which is a positive sign for its financial health.
      • The company is investing heavily in its 5G and fiber networks, which is driving growth in its Mobility and Consumer Wireline segments.
      • The company is reducing its debt levels, which is a positive sign for its financial health.
      • The company's strong cash flow generation will allow it to continue to invest in growth opportunities and return capital to shareholders.
    • Risk Factors
      • The company's revenue growth is decreasing, which could be a concern if it continues to decline.
      • The company's reliance on its 5G and fiber networks could be a risk if these technologies do not continue to grow in popularity.
      • The company's debt levels are still relatively high, which could be a concern if interest rates rise.
    • Future Outlook
      • The company is well-positioned for future growth, driven by its investment-led strategy and its focus on organic growth.
      • The company's strong cash flow generation will allow it to continue to invest in growth opportunities and return capital to shareholders.
      • The company's financial flexibility will allow it to navigate potential economic downturns.
Most recent earnings report
Financial statements 
All public filings
Comparative Analysis
Benchmarks (as of 2024-09-04)
The Communication Services Select Sector SPDR Fund (XLC)
  • Performance Comparison: AT&T, Inc. (T) has exhibited a mixed performance history compared to The Communication Services Select Sector SPDR Fund (XLC). While T has outperformed XLC over the past year and three years, XLC has been a stronger performer over the past two years. This suggests that T's performance has been more volatile than XLC's.
  • Risk and Return Analysis: AT&T, Inc. (T) has generally provided lower annualized returns than The Communication Services Select Sector SPDR Fund (XLC) over the past three years. However, T has also exhibited lower annualized volatility than XLC. This suggests that T is a less risky investment than XLC, but it also comes with lower potential returns. The maximum drawdown figures further support this conclusion, with T experiencing a maximum drawdown of 36.46% compared to XLC's 46.65%. This indicates that T has been more resilient to market downturns than XLC.
  • Risk-Adjusted Performance: The Sharpe Ratio of AT&T, Inc. (T) has generally been lower than The Communication Services Select Sector SPDR Fund (XLC) over the past three years. This suggests that XLC has offered a better risk-adjusted return than T. However, it's important to note that there have been periods where T's Sharpe Ratio has outperformed XLC's, indicating that T has offered a better risk-adjusted return during those periods. The beta values further support this conclusion, with T's beta generally below 1 and XLC's beta generally above 1. This suggests that T is less sensitive to market movements than XLC, making it a less risky investment.
  • Overall Assessment: AT&T, Inc. (T) has been a less volatile investment than The Communication Services Select Sector SPDR Fund (XLC) over the past three years, but it has also provided lower returns. This suggests that T is a less risky investment than XLC, but it also comes with lower potential returns. Investors seeking a more conservative investment with a lower risk profile may find T attractive. However, investors seeking higher potential returns may prefer XLC, despite its higher risk profile. It's important to note that the performance of both T and XLC can change quickly, and investors should monitor these trends closely.
Peers Price History(as of 2024-09-04)
Deutsche Telekom AG (DTE)Verizon Communications, Inc. (VZ)
  • Performance Comparison: AT&T (T) has generally outperformed Verizon (VZ) and Deutsche Telekom (DTE) over the past three years. However, there have been periods where AT&T (T) has underperformed its peers. For example, in the 2-year period, AT&T (T) underperformed Deutsche Telekom (DTE) by 24.55%. This suggests that AT&T (T) may be more volatile than its peers, but it has also been able to generate higher returns in some periods.
  • Risk and Return Analysis: AT&T (T) has generally provided higher annualized returns than Verizon (VZ) but lower annualized returns than Deutsche Telekom (DTE) over the past three years. However, AT&T (T) has also been more volatile than Verizon (VZ) and Deutsche Telekom (DTE) over the same period. This suggests that AT&T (T) may be a riskier investment than its peers, but it has also been able to generate higher returns in some periods. The maximum drawdown figures from previous peaks also support this conclusion. AT&T (T) has experienced a maximum drawdown of 36.46%, which is higher than Verizon (VZ)'s maximum drawdown of 41.21% but lower than Deutsche Telekom (DTE)'s maximum drawdown of 20.34%. This suggests that AT&T (T) may be more susceptible to market downturns than its peers, but it has also been able to recover from drawdowns more quickly.
  • Risk-Adjusted Performance: AT&T (T) has generally exhibited a lower Sharpe Ratio than Verizon (VZ) and Deutsche Telekom (DTE) over the past three years. This suggests that AT&T (T) has not been as efficient in generating returns relative to its risk. However, the Sharpe Ratio of AT&T (T) has been increasing over the past three years, while the Sharpe Ratio of Verizon (VZ) has been decreasing and the Sharpe Ratio of Deutsche Telekom (DTE) has been increasing. This suggests that AT&T (T) may be improving its risk-adjusted performance over time. The beta values of AT&T (T), Verizon (VZ), and Deutsche Telekom (DTE) suggest that all three companies are considered to be relatively low-risk investments. However, the beta of AT&T (T) has been decreasing over the past three years, while the beta of Verizon (VZ) and Deutsche Telekom (DTE) has been relatively stable. This suggests that AT&T (T) may be becoming less sensitive to market movements over time.
  • Overall Assessment: AT&T (T) has generally outperformed Verizon (VZ) and Deutsche Telekom (DTE) in terms of historical performance, but it has also been more volatile and has experienced larger drawdowns. This suggests that AT&T (T) may be a riskier investment than its peers, but it has also been able to generate higher returns in some periods. The Sharpe Ratio of AT&T (T) has been increasing over the past three years, while the Sharpe Ratio of Verizon (VZ) has been decreasing and the Sharpe Ratio of Deutsche Telekom (DTE) has been increasing. This suggests that AT&T (T) may be improving its risk-adjusted performance over time. The beta values of AT&T (T), Verizon (VZ), and Deutsche Telekom (DTE) suggest that all three companies are considered to be relatively low-risk investments. However, the beta of AT&T (T) has been decreasing over the past three years, while the beta of Verizon (VZ) and Deutsche Telekom (DTE) has been relatively stable. This suggests that AT&T (T) may be becoming less sensitive to market movements over time. Overall, AT&T (T) appears to be a more volatile investment than its peers, but it has also been able to generate higher returns in some periods. The recent trends suggest that AT&T (T) may be improving its risk-adjusted performance and becoming less sensitive to market movements over time.
Peers Fundamentals(as of 2024-06-30)
Deutsche Telekom AG (DTE)Verizon Communications, Inc. (VZ)
  1. Market Position and Size:
    • T's market capitalization is generally in line with its peers, suggesting a similar size and market position. However, its revenue is significantly lower than VZ, indicating a potential difference in scale and market reach.
  2. Profitability and Efficiency:
    • T's profitability metrics are generally in line with its peers, suggesting a similar level of operational efficiency. However, its profitability is significantly lower than the industry average, indicating potential challenges in managing costs or generating revenue.
    • T's efficiency in generating returns is generally in line with its peers, suggesting a similar level of asset utilization and capital management. However, its returns are lower than the industry average, indicating potential areas for improvement in capital allocation or operational efficiency.
  3. Financial Health and Stability:
    • T's liquidity position is weaker than its peers and the industry average, indicating potential challenges in meeting short-term obligations. However, its debt position is relatively strong compared to its peers and the industry average, suggesting a lower risk of financial distress.
  4. Valuation and Market Perception:
    • T's valuation metrics are significantly lower than the industry average, suggesting a potential undervaluation by the market. However, its lower profitability and growth metrics could explain the lower valuation.
  5. Cash Flow and Capital Management:
    • T's cash flow generation is generally in line with its peers, suggesting a similar level of operational efficiency and capital management. However, its cash flow generation is lower than the industry average, indicating potential challenges in managing costs or generating revenue.
  6. Growth and Future Prospects:
    • T's growth metrics show a mixed picture, with inconsistent growth, deceleration trends, and a lack of balance across different metrics. This suggests that T may be facing challenges in maintaining its market share and competitive position.
  7. Potential for Investment:
    • T's investment attractiveness is mixed. While it has a strong debt position and a high return on equity, its lower profitability and growth metrics compared to the industry average raise concerns about its ability to generate sustainable returns for shareholders. Its valuation metrics are also significantly lower than the industry average, suggesting a potential undervaluation by the market. However, its lower profitability and growth metrics could explain the lower valuation.
  8. Key Risks and Considerations:
    • T's lower profitability and growth metrics compared to the industry average raise concerns about its ability to generate sustainable returns for shareholders.
    • T's weaker liquidity position could pose challenges in meeting short-term obligations.
    • T's inconsistent growth and deceleration trends suggest that it may be facing challenges in maintaining its market share and competitive position.
  9. Overall Assessment:
    • T's overall financial position is relatively strong, with a strong debt position and a high return on equity. However, its profitability and growth metrics are lower than the industry average, indicating potential challenges in managing costs or generating revenue. Its liquidity position is also weaker than its peers and the industry average, indicating potential challenges in meeting short-term obligations. T's competitive position is relatively weak, with lower profitability and growth metrics than the industry average. However, its strong debt position and high return on equity suggest a solid financial foundation.