Communication plunges, buy the dip?

On July 17th, the communication sector experienced a significant decline.

$AT&T Inc(T)$ and $Verizon(VZ)$ , with respective drops of approximately 6.7% and 7.5%, were among the bottom-performing companies in the $S&P 500(.SPX)$.

The cause of this decline was the downgrade of AT&T's rating by $JPMorgan Chase(JPM)$ over concerns about the progress of its wireless and broadband businesses.

Recent discussions with management revealed lowered expectations for wireless (reduced in May and June) and broadband (June) performance.

• AT&T is facing relatively less pressure in its mobile business (from Verizon, $T-Mobile US(TMUS)$ , and cable television) and consumer wired business (from cable television and fixed wireless access), as well as continued pressure in its business wired segment.

• The projected growth rate for mobile communication is expected to decrease from 4.7% in 2021 and 3.5% in 2022 to only 2.5% in 2023. Prepaid gross additions have decreased from 32% in 2022 to an estimated 30% this year.

• In late June, AT&T's CFO reported approximately 300,000 new mobile subscribers, significantly lower than the Wall Street analysts' forecast of 476,000.

• Regarding broadband fiber services, it is anticipated that the company's cable television subsidiary will regain some market share, but it is also facing continuously rising bandwidth costs.

• The company is preparing to reduce expenses to repay its debts. While AT&T continues to generate "significant" free cash flow, the amount available for debt repayment or share buybacks is limited.

• DirecTV's cash generation will continue to decline, with half of its $8 billion in free cash flow being used to pay dividends, further diminishing its appeal to shareholders.

• With the $2.4 billion C-Band payment due at the end of 2023 and higher taxes, the company's balance sheet repair funds will be quite limited.

JPMorgan downgraded AT&T's stock rating from overweight to neutral and lowered the target price per share from $22 to $17. Therefore, although companies in this industry are still undervalued, reaching historical lows and offering decent dividends, investors remain unenthusiastic.

PE TTM