AT&T Inc (NYSE:T) reported third-quarter FY23 operating revenues of $30.35 billion, up 1% year-over-year, beating the consensus of $28.69 billion. Adjusted EPS of $0.64 beat the consensus of $0.59.

Scotiabank analyst Jeff Fan upgraded AT&T from Sector Perform to Sector Outperform and an $18.5 price target.

Firstly, Fan sees a focus on reducing volatility in reported FCF by reducing reliance on vendor financing. 

Secondly, while wireless net phone loading is coming down, churn and ARPU trends remain optimistic and are acting to reduce the dependence on loading to meet bottom-line growth goals. 

Thirdly, the company’s current dividend yield has become hard to dismiss even when taken in the context of the overall higher rate environment. 

In 2024, the analyst expects FCF to improve, supported by low capital intensity, improving operating earnings, and reduced working capital usage.

AT&T’s wireless loading picked up sequentially with Q3 postpaid phone net adds of 468K (vs. 326K in Q2F23 and 708K in Q3F22).

 Despite continued expected normalization in the U.S. wireless market through 2023, the company saw the highest levels of Apple Inc (NASDAQ:AAPL) iPhone pre-orders in many years while continuing to report low postpaid phone churn of 0.79%.

Higher ARPU, consistently low churn, and subscriber growth combined boosted wireless service revenues and EBITDA. Fan expects Q4 postpaid phone net adds of 430K and continued wireless service revenue growth at 3.9% Y/Y.

The company gained 15k broadband customers in Q3, marking a slight return to positive broadband net adds. The broadband fiber experienced ARPU growth of 8.9%, driven by greater consumer uptake on faster speed tiers. 

An increase in fiber subscribers and higher ARPU growth has contributed to the acceleration of 9.8% Y/Y in broadband revenues. Fan expects consumer wireline EBITDA to grow by 0.7% in 2024 vs a decline of 5.1% in 2023.

Quarterly FCF volatility elevated at AT&T, and this has caused pressure on valuations. The analyst said that management has, in recent months, decided to tackle this problem head-on by reducing short term supplier and vendor financing obligations to stave off the ups and downs in working capital in future quarters. 

In FY24, Fan expects to see less quarterly FCF volatility due to actions taken in 2023.

Fan projects Q4 revenue and EPS of $31.17 billion vs. consensus $29.88 billion and $0.51 vs. consensus $0.54.

Price Action: T shares traded higher by 1.51% at $15.49 on the last check Friday.