Cowen Just Lowered Its AT&T Price Target

On March 23, Cowen & Co. released a note updating their model for AT&T Inc. T based on information contained in a recent company 8-K filing, resulting in a lower price target, while maintaining AT&T's Market Perform rating.

In the report, Cowen reiterated its Outperform rating on its Top Picks with the following price targets as of March 20:

• Level 3 Communications, Inc. LVLT - $62 PT, potential 11.9 percent upside.
• Rackspace Hosting, Inc. RAX - $75 PT, potential 39.8 percent upside.
• T-Mobile US TMUS - $48 PT, potential 44.8 percent upside.

Level 3, Rackspace and T-Mobile have market caps of $19 billion, $7.6 billion and $26.8 billion, respectively. AT&T's $172.5 billion market cap makes it much harder for the company to move the needle.

Related Link: Will Apple And AT&T Break This Dow Transition Pattern?

Tale Of The Tape - 2015

Cowen Rationale - AT&T: Maintains Market Perform, Lowers 2015 PT

• Cowen lowered its AT&T price target to $35 from $37, based upon its discounted cash flow (DCF) model which utilized a 6.5x EBITDA multiple and a 6.9 percent cost of capital.

Additional model assumptions:

• 2014-2019E Revenue CAGR of 1.3%
• EBITDA margin to 35% by 2019

Subscriber Metrics:

• Cowen noted "wireless margins down Y/Y (1Q14 of 45.4%) due to continued adoption of Mobile Share Value (60% of postpaid smartphone base) and Cricket results."
• AT&T expects wireline revenues down Y/Y for 1Q 2015, and but forecasts margin improvement in future quarters.
• AT&T expects the ~$48.5 billion merger with DirecTV DTV to close 1H2015; and to result in one time charge of $134 million from a reduction in headcount of 3,000 employees.
• Cowen's model assumption of $18.1 billion revenues for AT&T wireless remained unchanged; but lowered "service margin to 42.8% from 45.2%."

• The Cowen model assumes that AT&T will borrow $13 billion at a 4.1 percent interest rate in conjunction with its recent $18.2 billion AWS-3 spectrum auction award.
• Cowen "fine-tuned" its model to include the capitalization of this interest during 2015 and 2016, with this interest being expensed in 2017, (assumes deployment of AWS-3 spectrum beginning Jan. 1, 2017).
• Based on these assumptions, Cowen's DCF model now reflects a lowered 2015 interest expense to $3.44 billion, down from $3.97 billion.

Depreciation Expense Reduction:

• AT&T extended the useful life of software assets from three to five years.
• AT&T sold $2 billion of Connecticut wireline assets.
• Cowan reduced depreciation expense to $17.8 billion, down from $18.32 billion.

Cowan AT&T PT Risk Factors:

• Competition and consolidation in the wireless industry could result in "disruptive/irrational pricing as smaller carriers seek to gain market share the wireless industry."
• AT&T's wireline and business services are "reliant to a certain degree" on the macro-economy and business spending.
• AT&T has grown its dividend and if this were unable to continue it would have a negative impact on the stock price; changes in the interest rate environment could impact the AT&T stock price either positively or negatively.

Bottom Line

Cowen viewed 2015 "as a transformative year" for AT&T, citing: financing of the AWS-3 spectrum, three "meaningful acquisitions," new international markets, new TV products, and mobile video platform, while facing "intense U.S. competition."

Notably, AT&T reiterated full-year 2015 guidance.