AT&T Is Investing For Tomorrow While Generating Cash Today

The brokerage, which maintains its Buy rating and $45 target price, said the recent management meetings reinforced its bullish thesis on AT&T's competitive/strategic positioning versus peers. Moreover, the carrier's scale and efficient cost structure across distribution platforms results in strong free cash flow generation.

"Our view is a function of T's unique scale and clearer path to mid-single digit EPS growth (vs. peers), supported by a healthy and growing 5 percent dividend yield," analyst Matthew Niknam wrote in a note.

Further, Niknam says concerns may have been overdone as AT&T pulled its "free iPhone" (subsidy) promos late September post iPhone 7 launch.

"Commentary implies activity post iPhone launch was ahead of expectations, though we still anticipate upgrade and activation levels to be down from year ago levels. Given AT&T's large iOS base, we estimate a greater share of activity was retention-based," Niknam highlighted.

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Niknam, therefore, modestly raised his third quarter upgrade percentage forecast to 5.3 percent from 5 percent. Despite the number is lower than last year's 5.7 percent, it is higher than (5.0 percent/4.6 percent in 1Q/2Q16).

Due to higher promotions, the analyst lowered his third quarter wireless service margin forecast by 50bp to 49.4 percent. However, he maintained his postpaid churn expectation at 1.10 percent, and forecast a peer-low postpaid phone net adds forecast of (275,000).

Meanwhile, AT&T expects DTV Now to contribute more materially to volumes/financials in 2017 despite launching sometime in the fourth quarter.

In addition, contrary to a recent Bloomberg report, the analyst believes a content-related M&A is unlikely for AT&T in near-term as it is re-investing its robust FCF into growth initiatives (DTV Now, Mexico, spectrum) and debt paydowns.

Shares of AT&T closed Monday's trading at $39.01. At last check, the stock was down 0.49 percent at $38.81 in the first hour of Tuesday's regular trading session.

Full ratings data available on Benzinga Pro.