AT&T: My Top Investment For 2022 Is An Undervalued Company The Market Hates

Summary

We’ve discussed AT&T plenty of times before. However, the purpose of this article is to deep dive into the company as our top investment idea for 2022.

AT&T has an almost 9% dividend yield that will remain at a minimum of 4-5% post-Time Warner spin-off. The company has the cash flow to comfortably cover that dividend.

AT&T is investing in rapidly expanding its Fiber business, a unique division of the company while remaining competitive in its other divisions.

AT&T, should management be intelligent about value, has a unique pathway towards double-digit shareholder rewards through the 2020s.

All investments have their risks, however, AT&T’s potential rewards significantly outweigh its risks making it a valuable long-term investment.

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hapabapa/iStock Editorial via Getty Images In general, our “Top Investment Recommendation” is an opportunity we take every year to put out the stock that we expect will outperform over the coming year. In 2021, that was the Vanguard Energy ETF (NYSEARCA: VDE ), discussed here , which performed quite well. For 2022, our top investment recommendation for the year is AT&T (NYSE: T ).

AT&T is a $165 billion company we’ve discussed several times before. Most recently, we discussed the company’s 3Q 2021 earnings here and discussed the company’s Time Warner business here . The purpose of this article is to discuss how AT&T’s valuation relative to the market, combined with its cash flow, makes it our top 2022 investment recommendation. AT&T Time Warner Valuation

Let’s start with valuing AT&T’s Time Warner business, since this is a business that will be passed out to shareholders within the next year, representing one of the fastest sources to monetizing a part of their investment. AT&T Time Warner Transaction – AT&T Investor Presentation The transaction around Time Warner is building a new business with $39 billion in combined revenue growing to $52 billion over the next several years. Given the company’s HBO Max and DTC growth, we see it being closer to $60 billion by this level. This will translate to $12 billion in 2020 adjusted EBITDA growing to $14 billion.

We see 2023PF EBITDA closer to $15-16 billion supporting the company’s planned aggressive debt pay down strategy ($18 billion in the next two years). The company’s lower interest expenses can help support FCF growth, with continued synergies supporting ~$10 billion in 2023-2024 FCF for the business.

The market capitalization valuation on that business, with ~$40 billion in debt is tough to place exactly, however, in our view that business deserves a market capitalization of at least $100 billion, depending on HBO Max’s position. We also see it as an acquisition target. Putting a “per share” present day valuation on it is tough, the market is currently valuing it at ~$5 / share.

For AT&T we see the valuation of the business as closer to $10 / share, but see the share price pressure as due to AT&T’s overall underperformance. This is a key amount of value unlocked over the next year. AT&T Fiber and Mobility Business

AT&T is investing in significant growth, particularly in its Fiber business. AT&T Repositioning – AT&T Investor Presentation

For the company’s fiber business, the rationale is simple. The company currently reaches ~15 million customer locations with a ~37% growing penetration rate. The company plans to double customer locations within four years. We’d like to see it grow faster, but fiber buildout is a time consuming and expensive business.

Combined with an expected growing market share, we see the company’s annual fiber revenues growing from ~$3 billion annually currently to ~$9 billion in 2025. That’s ~$6 billion in new revenue from the business enabling continued cash flow.

The company also is focused on continuing market share gains in the mobility business through continued customer savings and support. Bundling with the fiber business is a significant opportunity for the company. The company faces significant mobility competition but with customer service not a priority in the sector it has significant opportunity. AT&T Debt

AT&T has significant long-term debt. AT&T has significant long-term debt and over the last half decade that number has increased significantly. The company has ~$150 billion in current long-term debt that’ll move toward the $105 billion number post the debt passed to Time Warner with the spin-off. That debt is currently costing a coupon of roughly 4.5%.

That means the company is spending ~$5 billion in annual interest expenditures. The […]

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