While the tech sector, in a broad sense, has been one of the most stellar performers in the marketplace for the past few years, telecommunications stocks, almost all of which have operations that naturally bleed into many of the same areas as some of the largest tech companies in the world, haven’t followed suit. Since 2017, telecommunications stocks as measured by the iShares Telecommunications ETF (IYZ) is down nearly 20%, with only a boost over the last month of about 10% offering some solace to investors who have been following that trend lower.
It’s a little ironic, given the very impressive fundamental profile of a lot of stocks in this sector, particularly the two biggest names in the space, Verizon Communications (VZ) and AT&T (T). T is a good proxy for the entire sector’s underperformance, since it has dropped by nearly 24% since January of 2017 to its current level around $33 per share. Some of that price decline, I think is tied to T’s position not only in the incredibly competitive wireless industry, where margins are pretty tight, but also in the Entertainment portion of its business. In 2015, the company acquired DirecTV, the satellite TV provider, and in June of this year completed one of the biggest acquisitions of this year by purchasing Time Warner. Together, DirecTV and Time Warner give the company a strong presence in the Entertainment industry, but a lot of investors have a dim view of that industry given broad trends pointing towards increased cord-cutting by consumers as they shift more and more to streaming, on-demand video services. Overall, however, its strong fundamental profile really just underscores the opportunity that I think really exists in company with massive cash flow, and that has been smartly investing a massive amount of its R&D resources into the next generation of wireless technology, acquiring 5G spectrum licenses across the country and starting to build out the infrastructure that will be needed to make 5G connectivity available nationwide.
Fundamental and Value Profile
AT&T Inc. is a holding company that provides communications and digital entertainment services in the United States and the world. The Company operates through four segments: Business Solutions, Entertainment Group, Consumer Mobility and International. The Company offers its services and products to consumers in the United States, Mexico and Latin America and to businesses and other providers of telecommunications services worldwide. It also owns and operates three regional TV sports networks, and retains non-controlling interests in another regional sports network and a network dedicated to game-related programming, as well as Internet interactive game playing. Its services and products include wireless communications, data/broadband and Internet services, digital video services, local and long-distance telephone services, telecommunications equipment, managed networking, and wholesale services. Its subsidiaries include AT&T Mobility and SKY Brasil Servicos Ltda. T has a current market cap of about $238.4 billion.
- Earnings and Sales Growth: Over the last twelve months, earnings grew by more than 15%, while revenue declined a little over 2%. Growing earnings faster than sales is difficult to do, and generally not sustainable in the long-term, but it is also a positive mark of management’s ability to maximize its business operations effectively.
- Free Cash Flow: T’s free cash flow is very strong, at more than $19.3 billion. This number has increased steadily since early 2015, from about $10 billion.
- Dividend: T’s annual divided is $2.00 per share, which translates to a very impressive yield of 6.09% at the stock’s current price.
- Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but one of the simplest methods that I like uses the stock’s Book Value, which for T is $29.99 and translates to a Price/Book ratio of 1.09 at the stock’s current price. The stock’s historical average Price/Book ratio is 1.94, which gives value-oriented investors a long-term target price a little above $58 per share, a level that would put the stock near to highs not seen since 2001, when the stock traded at around $60 per share. A 76% long-term target may be a little over-ambitious, but it certainly suggests that the stock’s 52-week highs around $44 – approximately 33% above the stock’s current price – should be useful and attainable.
Here’s a look at the stock’s latest technical chart.
- Current Price Action/Trends and Pivots: The red diagonal line measures the length of the stock’s longer-term downward trend over the last couple of years; it also informs the Fibonacci trend retracement lines shown on the right side of the chart. The stock has rallied nicely this month off of its trend and 52-week low price at around $30, and is now about $2 away from its nearest major resistance level at $35 as shown by the 38.2% retracement line. A break above that level would be required for the stock to build enough sustainable momentum to actually reverse its long-term downward trend. On the other hand, a drop below $30 would break the stock’s current support level and reconfirm its downward trend yet again.
- Near-term Keys: The stock’s current price level isn’t very conducive to a bullish short-term trade right now, despite the stock’s recent rally, and even with $2 from its current price to resistance; after all, it is about $3 away from support, meaning that downside risk right now is actually higher than near-term upside potential. That ratio won’t change unless the stock breaks above $35; look for that level as a signal to think about buying the stock outright or starting to work with call options. If the stock does break back down, look for a push below $30 as a signal to short the stock or start using put options.