By Teresa Rivas
Legacy telecom can be a tough space for investors, but AT&T's recent gains added to what has already been an unusually good year for the firm.
Shares of AT&T bucked the broader market selloff on Wednesday thanks to strong second-quarter results that included better-than-expected net phone subscribers.
It wasn't a perfect quarter; revenue missed analysts' estimates, its 239,000 new AT&T Fiber subs didn't meet consensus, and operating margins were lower as the company keeps losing business wireline customers. Nonetheless, investors were heartened by the strong growth in wireless customers and the company's ability to maintain guidance.
"We think results suggests AT&T continues to benefit from its transition to pure connectivity," writes Oppenheimer analyst Timothy Horan, referencing how the company is now more of a pure-play telecom following its Warner Bros. spinoff.
That move gave the company a big cash injection that has helped it reinvest in its business and fund its generous dividend, with its yield now at 5.7%.
"We came away more positive on the overall wireless industry," he notes of the quarter, which led him to raise his price target to $23 from $21 and reiterate that AT&T is his top pick in the industry.
Nothing happens in a vacuum. AT&T's report looked even better coming on the heels of results from Verizon Communications. Although Verizon also saw strong subscriber growth, the company's shares had their worst day in years following the second-quarter report on Monday.
"Earlier this week we noted that Verizon would likely remain the #3 player in wireless in terms of subscriber additions. We received partial confirmation when AT&T posted outstanding growth," writes Gimme Credit's Dave Novosel. "AT&T recorded retail net adds of 593,000 versus the 340,000 adds at Verizon. More important, AT&T added 419,000 net retail phone subs compared with only 148,000 at Verizon. Prepaid adds of 82,000 at AT&T were not great, but they exceeded the loss of 624,000 at Verizon."
It isn't uncommon for AT&T and Verizon to be compared with one another or trade places in terms of investor favor. At the start of the year, Barron's noted that Verizon had rapidly pulled ahead for several reasons but that it was quite likely the pattern wouldn't last, with AT&T subsequently playing some catch-up.
The fact is that AT&T and Verizon are remarkably similar, facing many of the same headwinds that can make it hard for one to meaningfully pull ahead of the other over the long run. They have also both historically underperformed the broader market in recent years.
That makes the fact that AT&T isn't only outperforming Verizon and industry favorite T-Mobile but also matching the S&P 500's gain in 2024 even more out of the ordinary.
That could be due to AT&T's investments in its fiber network, which might clinch more consistent market share in two very popular subscriptions: cell service and home internet.
"We view a well-run home broadband connection as second only in demand to mobile phones," writes Raymond James analyst Frank Louthan. "As such, if a provider owns both of these products and bundles the two together, it should result in lower churn and a more stable base of business for both products. Fiber has an advantage in this on many fronts. With the most shots on goal of the Big Three national wireless providers, AT&T is well positioned in this regard. Cable companies have solid broadband bases, but lack owners' economics on the wireless side."
That leads him to reiterate a Strong Buy on AT&T, which he calls the "best large cap total return story over the next 12 months" in his coverage.
Ultimately, AT&T may struggle to shed its stodgy reputation, and earnings and revenue growth will remain quite modest -- in the low-single-digit realm next year -- if Wall Street's projections are borne out. Still, for investors who are interested in the telecom space for its relatively steady performance and generous payout, AT&T may be looking more attractive than it has in the past.
Write to Teresa Rivas at teresa.rivas@barrons.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
July 25, 2024 14:46 ET (18:46 GMT)
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