It’s not often that a stock hits a 30-year low, but AT&T (T 3.00%) did just that last summer in the wake of revelations that “toxic” lead-clad cables left behind underground and underwater by the company decades ago could cost it billions of dollars to remove and properly dispose of.
The lead cables issue was the latest ignominy to hit the telecom giant, coming after years of underperformance that included a failed bid to buy Sprint, losing market share to more nimble competitors like T-Mobile, and a series of disastrous acquisitions, including DirecTV and Time Warner, that have destroyed tens of billions of dollars in market value.
However, just when it seemed as though things couldn’t get any worse for AT&T, the company started to turn around. Since July 17, when the stock hit bottom at $13.43 in the wake of a Wall Street Journal investigation about the lead-clad cables, AT&T share prices have risen 24%, outperforming the S&P 500.
AT&T reported a solid fourth quarter
Investors were hoping that upward momentum would continue when it reported fourth-quarter earnings on Wednesday, but that wasn’t the case. The stock finished the session down 3% as it beat estimates on the top line, but missed them on the bottom line. Its earnings guidance was also below expectations.
The chart shows how the quarter went for AT&T.
As you can see, AT&T reported revenue growth of 2.2% to $32 billion, ahead of the consensus at $31.5 billion. That was driven by strong growth in mobility revenue, as wireless service revenue rose 5.9% to $16 billion.
Solid subscriber growth also showed investors that the company was executing on its growth initiatives, with 526,000 postpaid phone net adds in the quarter, meaning monthly phone contract subscribers, which was better than Verizon‘s at 499,000. AT&T also said that it grew its base of AT&T Fiber subscribers by 273,000, marking its 16th straight quarter with at least 200,000 net adds.
The telecom giant achieved its goal of $6 billion in run-rate cost savings, and it’s focused on slashing costs by another $2 billion by mid-2026.
Image source: Getty Images.
Free cash flow (FCF) is a key metric in the industry, and AT&T hit its goal there, posting $16.8 billion in FCF, and $6.4 billion for the fourth quarter. However, adjusted earnings per share fell from $0.61 in the quarter a year ago to $0.54, which missed estimates at $0.56.
Investors also seemed disappointed by the company’s guidance for 2024. While its top-line forecast was solid, calling for 3% wireless service revenue growth and at least 7% broadband revenue growth, management expects adjusted earnings per share of $2.15-$2.25, which was below the consensus at $2.46 and 2023’s adjusted EPS of $2.41. The forecast includes some special items such as $0.17 per share for higher depreciation expense for accelerated depreciation from its open radio network (Open RAN) transformation, which relates to a new partnership with Ericsson to develop the technology to shift 70% of AT&T’s wireless network traffic to Open RAN platforms by late 2025.
Management said it would return to adjusted EPS growth in 2025.
Is AT&T finally a buy?
Despite the stock’s sell-off, AT&T’s report had more good news than any of its quarters in recent memory. The company hit its free cash flow goal after hiking it earlier this year. It delivered strong subscriber additions in both phones and broadband, and it expects free cash flow and adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) growth as well, showing that the business is growing on the bottom line, at least according to some key metrics.
Much of AT&T’s poor performance over the last 30 years relates to its misguided acquisitions, and management is now fully focused on the telecom business. Even though the company still carries a massive debt balance of more than $130 billion, the business is solidly profitable and appears to be on the right path to steady growth. It should also benefit from the expected decline in interest rates later this year, which will help lower its interest expense and make its 6%-plus dividend yield more attractive.
At a price-to-earnings ratio of under 8 and with its key metrics moving in the right direction, it finally looks safe to buy AT&T.
