Even After Post-Earnings Spike, Argus Says AT&T Valuation Remains Favorable

Analyst's Take

The firm noted that the company has locked up video content distribution rights with its DIRECTV deal. Nevertheless, Argus indicated that the company is facing intensive price competition from T-Mobile US Inc TMUS and Sprint Corp S for both high-end postpaid and lower-value prepaid subscribers. This, according to the firm, has necessitated the need for diversifying into satellite video and Mexico/South America.

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Although Bonner sees risks from exchange rate, he sees the expansion as an opportunity for upgrading its Mexican wireless networks to 4G LTE. The analyst sees the DTV integration, the current spectrum auction and the advent of 5G wireless as avenues that can keep the company occupied.

Quarterly Results

Commenting on the recently released second-quarter results, Argus said the 22 percent revenue outperformance came about due to the DIRECTV deal that materialized in July 2015 and that cost reductions and efficiency improvements drove a 30 basis point-improvement in operating margins to 20.1 percent.

For 2015–2018, Argus noted that AT&T expects revenue growth equal to GDP growth, EPS growth in the mid-single digits or better, higher consolidated margins and a dividend payout ratio in the 70 percent range.

The company's financial strength is rated as Medium on Argus' five-point scale. While noting that AT&T has outperformed the S&P 500 Index in the year-to-date period, Argus said the shares are still trading below the low end of its five-year average range for trailing enterprise value/EBITDA and below its peer group average of 7.9.

Argus raised its 2016 earnings per share estimate for the company to $2.87 from $2.85, while the 2017 earnings per share estimate was maintained at $3.01. The firm also upwardly adjusted its price target for the shares of the company to $51 from $45.

At time of writing, AT&T shares were trading down 0.82 percent at $42.76.

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