Despite the ambitious drag of AT & T (T) to position itself as a dominant player in the digital space…
Despite the ambitious drag of AT & T (T) to position itself as a dominant player in the digital space as a provider and distributor of wireless connectivity and entertainment content, the stock has been repeatedly hit down to close to 52 weeks of low levels. The huge burden of debt that AT & T has accumulated has sparked the market in the face of rising interest rates and heavily published deposits of other highly leased units (see General Electric (GE)). While high debt burden is a reasonable cause for concern for any investment, AT & T’s forecasted cash flow is sufficient to divide the balance sheet within a reasonable period of time. When this happens, profit growth should begin to accelerate. The current price of almost $ 31
per share is an excellent opportunity to collect shares. With modest growth, AT & T is ready to deliver annual overall return of more than 20% over the next five years.
AT & T took a large debt burden in order to acquire DirecTV and Time Warner. So far, it has a debt of approximately $ 183 billion. This has left AT & T sharply delivered to 3.37X EBITDA. While the stock has been punished to blame so much, the numbers will not look as bad in the near future. AT & T is a cash flow generator that generates money from its stable mobile business. With Time Warner, in the business, 2019 projected management combined free cash flow of $ 26 billion at its latest analytical meeting.
The $ 26 billion in the FCF is slightly higher than the cash flow we have seen immediately after the merger. This big step in the amount of cash flows makes a lot of effort to dispel previous question marks I’ve had about how long it takes for management to get this debt under control. With the updated FCF outlook, the size of AT & T’s cash “shovel” grows to burst out of debt to about $ 12 billion.
Source: AT & T
The updated management timeline reflects the company operating at 2.5x EBITDA at the end of 2019. A leverage ratio of 2.5X corresponds exactly to the ratio I use as my “warning sign “threshold. Given the excellent reliability of AT & T cash flow, the capture of this leverage would substantially eliminate all concerns about the company’s debt burden and liquidity. The worst would be well past AT & T at that time.
When debt comes down, the company’s earnings growth and cash flow will also improve. AT & T has paid approximately 7.77 billion dollars in interest expenses during the TTM period. (Full-time running time Time Warner is over $ 8 billion). Given AT & T’s float, this earnings per share will remain at a total of $ 1.19.
Source: AT & T
It has been well known that the acquisition of Time Warner was the latest step in AT & T’s massive transition from a telecom to a fully integrated data / content ecosystem. AT & T’s transition once only provides management of the “pipes” that delivered data and content to customers, giving the company increased competitive advantages in terms of utilizing their free assets to gain consumer value. This new model not only diversifies operations (mobile operations now account for half of adjusted EBITDA), but unlock innovation options to fully utilize AT & T’s integrated model.
We’ve already seen this with AT & T’s bundling of wireless services with DirecTV to win over customers (it worked for this guy). AT & T has recently prepared its next step in this process by detailing its upcoming streaming service.
Source: AT & T
AT & T launches its offer to the increasingly competitive streaming market by the end of 2019. The service is multi-tiered and will contain a collection of AT & T’s new proprietary intellectual property rights from HBO, TBS, TNT, Cartoon Network and Time Warner Studios – while further licensed content is included. While AT & T is already on the market to get DirecTV to traditional cable consumers, this service will enable AT & T to effectively reach the pure streaming audience.
Source: AT & T
AT & T also receives international steam with services that get traction in Mexico and South America. Although this segment only contributes 5% to EBITDA at present, there are already 31 million subscribers in 12 countries and generate more than $ 8 billion in revenues. The Latin American region has a population of over 625 million people, so AT & T’s low penetration rate provides much room for growth in the coming years.
Despite this development and manageable way out of its current debt burden – the stock continues to face downward pressure from the market.
The continued campaign of the stock represents an ongoing open window for investors. Analysts project full-year earnings per share of $ 3.52. Given the current share price of just under $ 31 per share, the profit multiple to the full-year income is unbelievably low at 8.7X. Based on AT & T’s 10-year median multiplication of 14.77X, the stock is potentially 40% undervalued against its historical standards .
If we look at a free cash flow perspective, the stock’s enhanced FCF record Time Warner has increased its return to a staggering 10.30%. The stock market has had little respect for companies’ improved cash flow flows due to AT & T’s debt burden. This free cash flow yield is the highest as it has been since the recession a decade ago.
Let’s look forward five years to form an approximate forecast of how an investment could look. To compile this, we will make some modest assumptions about what will happen in the next five years.
Analyzes and management project a low one-digit profit growth in 2019. However, as the company realizes synergies and continues to develop its flowing / international growth engines, growth should accelerate some. We assume an organic earnings per share of CAGR of 5% over the next five years.
During this time, management will also pay the balance sheet on an ongoing basis. Considering cash flows of $ 12 billion at the end of FY18, we conservatively assume that AT & T spend an average of $ 9 billion a year over the next five years against the debt. AT & T will see the FCF grow during this time, but for a margin of safety we will hold $ 9 billion a year. This would be a five-year debt reduction of $ 45 billion. The administration expects the debt for 2018 to total 170 billion dollars. At the end of FY23, it would place the total debt of about 125 million dollars. This means a reduction of AT & T’s debt of 25% at the end of the year.
An approximately 25% reduction in total debt would unlock about a quarter of interest expense as new business net income. Based on full-year interest rates (again these are rounded figures to illustrate one point) of approximately $ 8 billion in interest expenses, the $ 2 billion no longer paid as interest rate would add another $ 0.31 per share to revenue.
At the end of FY23, AT & T managed sports earnings per share of $ 4.80 per share based on organic growth and reduced interest expenses. Assuming normal market conditions, it would be solid logic to assume that investors save the AT & T balance sheet is far away now. So if we use media incomes more of 14.77X (which may increase due to AT & T’s business model changed), the resulting stock price would amount to approximately $ 71 per share. AT & T now pays a dividend of $ 2.00 per share, which is likely to be $ 2.20 per share when dividend growth is projected.
By the end of FY23, investors will have realized a price movement of $ 31 to $ 71. In the meanwhile, they have accumulated an additional $ 10.60 per share in dividends. The total return per share of $ 50.60 would be good for a CAGR of 21.36%.
The market continues to suppress AT & T’s stock due to concerns about the debt burden. But free cash flow forecasts are more than enough to handle this. The stock’s share price is so low in relation to historical norms that even modest growth over the next five years will result in outsourced returns. AT & T’s wireless operations are solid, and growth comes from international opportunities and streaming services that are coming soon. As AT & T continues to show progress in its immediate goals, the current opportunity is likely to end.
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