T - AT&T

[walkie518]

On a quantitative basis, AT&T appears fairly inexpensive in a DCF model. Should we believe management, stock trades around 10x FCF. There has been some pretty strong insider buying ($8m over the last 6 months).

 

The debt-load is fairly substantive relative to cash earnings, but it's likely not too much of a problem for such a stable business model?  Likely that it gets paid when it needs to be paid.  Even then there are companies out there with double the leverage in similar/same businesses.

 

From a consumer perspective, HBO has a number of great shows though may not hold a candle to the Netflix/Amazon.  Perhaps the synergies are more worthwhile for video customers? 

 

And yes, the business has a host of problems and there are new entrants that will certainly put pressure on margins, but are we oversold here?  There should be a few puffs left?

 

Can anyone provide a bear case? 

[valuedontlie]

It's a no growth business that requires a ton of capital, carries a huge debt load, with slim amount of cash leftover after the sacred dividend...

[walkie518]

It's a no growth business that requires a ton of capital, carries a huge debt load, with slim amount of cash leftover after the sacred dividend...

writing it off is certainly what the market is doing

 

however, wireless and mexico have shown recent growth

 

service margins look decent

 

revenues have slumped but that's negligible if there is more FCF?

 

on debt: $177B net debt and pension is funded through the next decade

 

Mgmt claims EBITDA is roughly $60B, maybe that's a bad number, but OCF for last 6 months per last 10Q was $19B...10K shows $39B...PP&Eannual expense is about $20B this number certainly includes additional investment and a lower tax rate certainly will help

 

Broadcast and programming costs should be offset by Time Warner a bit too...

 

OI + deprec =  $45B

 

Interest expense spikes on deal as does SG&A but net-net might be an additional $1B FCF over the asset-light returns of time warner before another $1B improvement in cash flow?

 

the run-rate for Warner is light...looks  like they didn't want to invest in a lot of new content before the merger, this looks like a negative but the library is certainly worth something...Netflix is overspending by billions here...we'll see what AT&T does to build a real HBONow?

 

I don't like that Brookfield Infrastructure is buying 31 of AT&T's datacenters...the latter must be leaving a fair amount on the table, anyone have AT&T's rationale for that deal?

 

[Spekulatius]

I’d rather own CMCSA. it’s a bit more expensive, but much better business, better management and better balance sheet. No contest for me really.

[frommi]

I own some T (3% position) and have quite a different opinion than the others here. I think they bought TWX for a pretty good price (since TWX has grown since the purchase, but they paid a pre-tax reform price). And this merger transforms the whole company away from the commodity business to a business with a moat. And when you think about it, they know a lot about their customers (they know where you are every time of the day!) so going further into advertising is a no brainer decision. HBO is a good way to invest money into a growing business and they can bundle and cross sell it to the mobile customers and create a high switching cost for them. And with 5G i can imagine that mobile data usage goes to a whole new level and they can probably grab marketshare from the cable businesses like CHTR etc. Because with a huge amount of bandwidth, why do you need a landline?

And you can buy this future growth power house for a 9% FCF yield! (At least when you add T`s and TWX`s cashflow pre-merger). The debt level at ~2.9x EBITDA looks manageable. And this business will easily survive the next recession and the 6% dividend got even safer with the merger. I have fair value around 40$ and a dividend that is growing at 3-5% in the future. Add that together you can get 18-20% returns over the next 3 years.

 

Btw. CMCSA has just performed 1.5% better per year over the last 15 years.

 

[wisborough]

every part of this business is in decline and its got way too much debt (for a declining business). its a total value trap and going to end very badly. T just looks cheap vs Comcast on equity multiples because of the stretched balance sheet.

[walkie518]

AT&T to offer 5G in 12 cities by the end of the year

 

https://www.theregister.co.uk/2018/09/10/att_5g_promises/

[walkie518]

Q3 looks pretty good here

 

Mgmt claims capex to be around $5.9B against $12.3B of op cash flow...

 

assuming this is true, $6.4B FCF for the quarter is a big number...even if $3.6B goes to shareholders via the dividend, this leaves $2.8B for reinvestment or debt pay down, per quarter

 

for sure, AT&T is a lesser business among its peers, but $6.4B/Q is a $25B run-rate and the mcap is $225B so trading at 11% FCF yield where a little more than half gets paid directly to shareholders

 

last 9 months, AT&T raised $38B of new debt to pay down $43B of old debt...net debt reduction of $5B since the Warner acquisition makes the deal start to look better than expected?

 

Anyone have other thoughts on the Q?

[walkie518]

attached is the earnings release and presentation

 

summary below

 

Full-Year Consolidated Results

• Diluted EPS of $2.85 as reported compared to $4.76 in the prior year

(2017 impacted by tax reform)

• Adjusted EPS of $3.52 compared to $3.05 in the prior year

• Cash from operations of $43.6 billion, up 15%

• Capital expenditures of $21.3 billion

• Free cash flow of $22.4 billion, up 36%

• Dividend payout ratio of 60%1

• Consolidated revenues of $170.8 billion

 

my first thought is that Warner seems to be working for AT&T despite a slight revenue miss (nothing warranting a 5% drop)

 

deleveraging is part of the process, but it seems $9B paid down is not immaterial

 

curious what else they will sell, Brookfield is a smart group but I think they made a bad buy on the datacenters, but we'll see

 

$12B after dividends sounds pretty good to me

 

add'l thoughts?

ATT_4Q18_Earnings.pdf

4Q18_Earnings_Release.pdf

[dwy000]

attached is the earnings release and presentation

 

summary below

 

Full-Year Consolidated Results

• Diluted EPS of $2.85 as reported compared to $4.76 in the prior year

(2017 impacted by tax reform)

• Adjusted EPS of $3.52 compared to $3.05 in the prior year

• Cash from operations of $43.6 billion, up 15%

• Capital expenditures of $21.3 billion

• Free cash flow of $22.4 billion, up 36%

• Dividend payout ratio of 60%1

• Consolidated revenues of $170.8 billion

 

my first thought is that Warner seems to be working for AT&T despite a slight revenue miss (nothing warranting a 5% drop)

 

deleveraging is part of the process, but it seems $9B paid down is not immaterial

 

curious what else they will sell, Brookfield is a smart group but I think they made a bad buy on the datacenters, but we'll see

 

$12B after dividends sounds pretty good to me

 

add'l thoughts?

 

Ironically, it appears the shortfall in revenues was entirely on the historic AT&T side with Warner outperforming.  The issues are with phone subs and TV subs (both DirecTV and Now).

 

With a 7%+ dividend easily covered by free cash flow, even with low single digit revenue growth (or none), this is pretty appealing at current levels.

[rogermunibond]

You'd be comfortable holding your T for 14 years and earning back your capital?    I'd be more comfortable doing that with Altria than T.

 

 

Ironically, it appears the shortfall in revenues was entirely on the historic AT&T side with Warner outperforming.  The issues are with phone subs and TV subs (both DirecTV and Now).

 

With a 7%+ dividend easily covered by free cash flow, even with low single digit revenue growth (or none), this is pretty appealing at current levels.

[walkie518]

You'd be comfortable holding your T for 14 years and earning back your capital?    I'd be more comfortable doing that with Altria than T.

 

 

Ironically, it appears the shortfall in revenues was entirely on the historic AT&T side with Warner outperforming.  The issues are with phone subs and TV subs (both DirecTV and Now).

 

With a 7%+ dividend easily covered by free cash flow, even with low single digit revenue growth (or none), this is pretty appealing at current levels.

agreed 100%

 

[dwy000]

You'd be comfortable holding your T for 14 years and earning back your capital?    I'd be more comfortable doing that with Altria than T.

 

 

Ironically, it appears the shortfall in revenues was entirely on the historic AT&T side with Warner outperforming.  The issues are with phone subs and TV subs (both DirecTV and Now).

 

With a 7%+ dividend easily covered by free cash flow, even with low single digit revenue growth (or none), this is pretty appealing at current levels.

 

Why would you just earn capital back?  The current 7% dividend is only 60% payout implying an 11% total cash return today without any debt paydown or buybacks.  Even with a low single digit growth rate that's a 12-15% stable annual return, which is pretty appealing to me.

[rogermunibond]

Because you can't trust that Randall won't do something with that FCF that's value destructive.

[dwy000]

Because you can't trust that Randall won't do something with that FCF that's value destructive.

 

If that's the case (for T or any other name), it's best just steering clear regardless of dividend, cash flow or price.

[TwoCitiesCapital]

I've been watching T (and other high yielding blue chips). My main concern has been with the debt - it's nice to see some commitment to reducing that figure as well as having flexibility post-dividend.

 

Might start a toe-hold position here.

[Spekulatius]

T has a storied history of incinerating capital with acquisitions - Direct TV being one example. While I agree they got Warner at a good price, I am not sure they are good at running it. I would rather own CMCSA at a similar valuation (EBITDA/ EV) but with a better business (cable vs wireless) and better management. In fact I believe right now CMCSA is a much better buy than T.

[walkie518]

Anyone might say DirectTV was a mistake, but that's in hindsight.  At that time, it would be speculative to think satellite tv would be dead and 5G was going to emerge.  For today, however, terrestrial has clearly won the battle.  Maybe this changes...

 

It's likely that WarnerMedia needs substantive capital injection to work, which neither CMCSA foresaw in buying NBCU or T buying Warner...NBCU is a big player, but I bet CMCSA thought they could reduce spend due to synergy...this likely doesn't happen so greater scale is needed as well as more spend on add'l content hence Fox

 

So here we are...

 

I think it's likely T does better... the mark is $26B of FCF this year.  Today, mcap is around $220B.  Say $15B goes right back to shareholders via divi (which just got a hike btw), this leaves $11B for debt paydown and investment.  Deck shows $12B. 

 

Sure, I'd prefer buyback at these prices rather than pay a higher divi, but that was the decision (raising seemed more in line with history than common sense and in this regard maybe Stephenson hasn't learned?)

 

with current FCF yield is roughly 12%, should debt reduction occur, buying today means buying into an increasing FCF yield/sh provided revenues do not decline across the businesses, there are no more bad deals, and the company is far more diversified than before

 

an assumption the market is currently making is that earnings decline very materially, I think this is highly unlikely despite the churn and negative headlines...then again, we'll see

[LC]

Thoughts on Verizon?

 

Not as great of a FCF yield (albeit close), but a better asset base I would argue.

[Broeb22]

Anyone might say DirectTV was a mistake, but that's in hindsight.  At that time, it would be speculative to think satellite tv would be dead and 5G was going to emerge.  For today, however, terrestrial has clearly won the battle.  Maybe this changes...

 

 

You mean speculative in the way that Charlie Ergen at Dish, DirecTV's main competitor, was buying loads and loads of spectrum, which is useful in a world where information flows two directions, instead of beaming down from a satellite? I would argue with the premise that this was some kind of black swan no one could have seen if they just looked around at what their competitors were doing and saying.

[rogermunibond]

There were lots of analysts and buy side saying T buying DTV was a mistake.  T mgmt knew the downside but thought they could gain from content cost synergies and cross-sell.  But given a secular trend of dropping high cost content subscriptions that was hubris.

[Liberty]

You mean speculative in the way that Charlie Ergen at Dish, DirecTV's main competitor, was buying loads and loads of spectrum, which is useful in a world where information flows two directions, instead of beaming down from a satellite? I would argue with the premise that this was some kind of black swan no one could have seen if they just looked around at what their competitors were doing and saying.

 

DISH hasn't exactly been doing great lately, though.

[walkie518]

I'm a little surprised that a big activist fund hasn't taken an interest...

 

Given Stephenson's history, I would think this might be a prime target?

[walkie518]

https://finance.yahoo.com/video/t-jumps-ellliott-management-discloses-182135004.html

[Gregmal]

https://finance.yahoo.com/video/t-jumps-ellliott-management-discloses-182135004.html

 

How long til this quack announces a $55 takeover offer? Then how long until he pulls it?