AT&T Inc. (NYSE: T) investors are optimistic that the company can extract long-term value from combining Time Warner’s content and advertising inventory with AT&T’s distribution network.
But while some analysts are optimistic about the opportunities for AT&T and Time Warner, others see AT&T’s massive debt load as a red flag for investors.
Bank of America analyst Vivek Arya says AT&T stock, which currently trades at a forward earnings multiple of 9.1, is historically cheap and provides an excellent entry point for long-term value investors.
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Arya says AT&T could generate a surprise earnings beat in the third quarter thanks to an under-the-radar accounting change related to content amortization costs. In addition, Arya says AT&T’s analyst day in November could serve as a bullish catalyst for the stock.
He says it’s understandable for some investors to be concerned about AT&T’s $190 billion in gross debt, but the company is currently generating cash flow that is well above its historical levels.
“We estimate AT&T can pay down 7 percent of net debt per year with normalized run rate free cash flow starting in 2019, which compares very favorably with telecom peers,” Arya says.
AT&T has said it plans to make deleveraging a top near-term priority. The company intends to reduce its leverage to 2.5x by the end of 2019, and continue to draw it down to 1.8x by the end of 2022.
Wells Fargo analyst Jennifer Fritzsche says the Time Warner acquisition is the right long-term strategy for AT&T, but it may take a long time for investors to start seeing returns on that investment.
“While the stock’s valuation appears compelling, we believe it has to get a few full quarters under its belt with [Time Warner] integration before the longer-term strategy gains more credibility with investors,” Fritzsche says.
In the meantime, she says investors should be concerned that prioritizing debt reduction over network investments could cost AT&T business.
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“Simply put — T’s capital is being pulled in many directions — but de-leveraging likely has to be the near-term focus,” Fritzsche says.
Bank of America has a “buy” rating and $37 price target for AT&T. Wells Fargo has a “market perform” rating and $35 target for AT&T stock.
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AT&T Inc. (T) Stock Has a Debt Problem originally appeared on usnews.com
