The slimmed-down telecom giant is generating stable growth again.

AT&T ‘s ( T 2.40%) stock rallied 8% on Oct. 20 after the telecom giant posted its third-quarter report. Its revenue from continuing operations declined 4% year-over-year to $30.0 billion, which still beat analysts’ expectations by $140 million. Excluding the spin-off of its U.S. video business last July, its revenue grew 3% year-over-year on a stand-alone basis.

The company’s adjusted earnings from continuing operations increased 3% to $0.68 per share, which also beat the consensus forecast by seven cents. Those headline numbers indicate AT&T’s business is stabilizing in the wake of its divestments of DirecTV and WarnerMedia. But is its stock finally primed to rebound after losing nearly a fifth of its value over the past three months? Image source: Getty Images. A fresh start for AT&T

AT&T’s debt-fueled purchases of DirecTV in 2015 and Time Warner in 2018, along with other smaller media companies, transformed it from a telecom company into a media behemoth. But AT&T struggled to balance all of those spinning plates. They came crashing down as the pandemic, tough competition, and other macro headwinds derailed its plans to build a media empire on top of its wireless and broadband businesses.

Over the past two years, AT&T reversed those mistakes by divesting DirecTV in a deal with TPG ( TPG 1.93%), merging Time Warner (WarnerMedia) with Discovery to create Warner Bros. Discovery ( WBD -2.30%), divesting its smaller media assets, and selling some of its real estate.

Prior to closing its spin-off of WBD in April, AT&T told investors the company could grow its annual revenue at a low-single-digit CAGR (compound annual growth rate) from 2022 to 2024, as well as increase its adjusted earnings before interest, taxes, depreciation, and amortization ( EBITDA ) and adjusted EPS at a mid-single digit CAGR. Those stable estimates suggested that the “new” AT&T would grow at a comparable rate as Verizon ( VZ 1.75%), which didn’t pursue any massive media deals. How fast is the new AT&T growing?

AT&T has now posted three quarters of results as a stand-alone company. Its mobility business, which houses its core wireless segment and generated 70% of its revenue in the third quarter, has consistently grown its postpaid phone subscribers and revenue over the past year. It’s also been locking in its customers with a low churn rate of less than 1%, while the EBITDA margins of its wireless services have been rising sequentially. Period Q3 2022 Q2 2022 Q1 2022 Postpaid Phone Net Adds 708,000 813,000 691,000 Postpaid Phone Churn 0.84% 0.75% 0.79% Mobility Revenue Growth (YOY) 6% 5.2% 5.5% Mobility EBITDA Service Margin 55.2% 54.8% 53.7% Data source: AT&T. YOY = Year-over-year.

However, AT&T’s business and consumer wireline segments, which together generated the remaining 30% of its revenue, is a bit messier. Its business wireline revenue has been declining throughout the year, due to softer demand for its legacy voice and data services (especially among government customers), and offsetting its slight growth in consumer wireline revenue. Period Q3 2022 Q2 2022 Q1 2022 Business Wireline Revenue Growth (YOY) (4.5%) (7.6%) (6.7%) Business Wireline EBITDA Margin 39.2% 36.2% 38.3% Consumer Wireline Revenue Growth (YOY) 1.4% 1.1% 2% Consumer Wireline EBITDA Margin 35.5% 34.3% 34.3% Data source: AT&T.

To counter that slowdown, AT&T has been expanding its consumer-oriented fiber network. That expansion boosted its total broadband net adds in the first quarter, but that trend reversed over the past two quarters as losses of non-fiber broadband customers (excluding DSL) overwhelmed the growth of its fiber business. Period Q3 2022 Q2 2022 Q1 2022 Fiber Net Adds 338,000 316,000 289,000 Total Broadband Net Adds (Excluding DSL) (29,000) (25,000) 5,000 Data source: AT&T. A stable outlook for the rest of the year

Looking ahead, AT&T plans to aggressively expand its 5G and fiber networks to offset the slower growth of its legacy wireline businesses. Those investments will account for most of its $24 billion in capital investments this year.

AT&T expects the strength of its core wireless business to offset weaknesses for the foreseeable future. It now predicts its adjusted EPS from continuing operations will rise to $2.50 “or higher” for the full year, compared to its prior outlook of $2.42 to $2.46. Based on those expectations, AT&T’s stock looks dirt cheap at seven times this year’s earnings.

AT&T also reiterated its full-year free cash flow ( FCF ) guidance of $14 billion (instead of reducing it again as it did in the second quarter), which should easily cover its $8 billion in […]

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