As the S&P 500 has charged nearly 80% higher over the past five years, AT&T’s stock has missed the boat — big time.
But the telecommunications stock, down 29% over a five-year span, now looks attractive, according to Oppenheimer analyst Timothy Horan. He upgraded AT&T’s stock
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to outperform from perform in a Friday morning note.
Horan sees promise in AT&T shares after the company spent years doing the “difficult” work of repositioning itself as a pure play on connectivity. “We believe these headwinds have moved to the rearview, and the stock is set to benefit from a number of tailwinds,” he wrote.
For one, AT&T has made “massive improvements” to both its network capacity and coverage, and across the wireless and wireline categories. Those moves have already helped the company grow average revenue per user, but Horan thinks that Wall Street is underestimating the potential for pricing uplifts.
See also: Verizon books $5.8 billion charge amid review of challenged segment
He notes that the company recently boosted the price of core unlimited plans by 99 cents a line, something that could bring in an estimated $700 million to $800 million in incremental revenue, but said that isn’t properly reflected in consensus expectations.
Further, Horan is upbeat about fiber and fixed-wireless-access trends. He’s encouraged that about 60% of AT&T’s broadband subscribers are on fiber, given that the company boasts “healthier margins” there and has room to raise prices, which are below what cable providers charge.
He also cheered the company’s progress in cost cutting, which helps benefit free-cash-flow, an all-important metric to AT&T investors given the company’s dividend. Horan sees the potential for AT&T to boast a “very strong” balance sheet a year from now, with a ratio of 2.5 net-debt-to-earnings before interest, taxes, depreciation and amortization. Nearly all of that debt will be fixed, and the majority will be due after 2023 with a roughly 4% average interest rate, he said.
“There is little incentive to pay down debt, so we expect [AT&T] to begin stock buybacks,” Horan wrote.
His $21 price target on AT&T’s stock is more than 25% above its recent level of $16.60. The stock is up 1.2% in Friday’s session.
Read: Verizon’s problems ‘aren’t just narrative’ — but here’s the bull case for the stock
