AT&T (NYSE:T) | Telecommunication

KhanZ AT&T Stock Analysis Overview

We have analyzed AT&T stock using our investment framework. We ask important fundamental and financial questions of AT&T and through the answers, we come to a conclusion to determine any potential investment case for AT&T.

Question 1: Does AT&T has superior Finance?

According to KhanZ Framework analysis AT&T currently does not has Superior Finance. It fails to show the strong 4 cornerstones of a business with superior financials. AT&T’s full Superior Finance Analysis

Question 2: Does AT&T share profits with shareholders?

AT&T shows an excellent track record of profit sharing. For that reason, It is certainly worth looking more into the business to find out the reasons why the business is lacking superior finances and still able to share profits. AT&T’s Dividend and Profit sharing Analysis

Question 3: What is the Intrinsic / Fair Value of AT&T Stock?

AT&T is also undervalued based on our DCF model. Our calculated current Fair Value is 35 USD. It could be that the market is punishing the business due to its lack of superior finances. This is a very good indication for us to dig deep to understand the bankruptcy risk of the businesses. Just because a business is cheap, we shall not immediately jump onto the train to buy it. In case of bankruptcy, we as common shareholders may lose all our capital. AT&T’s Intrinsic Value Calculation using 5 methods

Question 4: How AT&T performs against its competitions and Market?

AT&T generates steady and high-quality Free Cashflow, 27.5 Billion USD in 2020. They paid 17B in dividend, so we can say that their dividend is moderately safe. The interest payment was approximately 7.5 Billion. We like a business that has a cover ratio of 5 and above, AT&T is at 3.6

AT&T’s revenue has increased by 2.5% in the last 3 years. It’s nothing significant yet we are confident that AT&T has the capability to increase their prices to keep up with the inflation. The big picture analogy of AT&T

Question 5: What is upside and downside of AT&T?

AT&T scores very badly in the liquidity segment and it is one of the most important aspects. As an investor, your primary objective should be the protection of your capital. A bad liquidity score increases the chance of bankruptcy and thus permanent loss of capital.

Even though AT&T shows a high risk of losing capital, we still think it is worthwhile to take a deep dive at AT&T since it generates a high free cash flow and currently undervalued. We need to identify if this is a value trap or a potential turnaround.

Step 1. Does AT&T Have Superior Finance?

How Profitable AT&T is?

Years	Earnings Yield	ROA	ROE	ROIC	Net Margin
2020	-2.5%	-1.2%	-3%	-1.08%	-3.13%
2019	4.83%	2.52%	6.88%	4.10%	7.67%
2018	10%	3.64%	9.99%	5.39%	11.34%
2017	12.21%	6.63%	20.74%	9.74%	18.34%
2016	4.92%	3.21%	10.46%	5.38%	7.92
5 Y Average	5.88%	3%	9.01%	4.71%	8.43%
5 Y Median	4.92%	3.21%	9.99%	5.38%	7.92%

Table 1: AT&T’s Profitability Matrix, prepared by KhanZ Invest, data source: AT&T Annual Report

Is AT&T Growing as a Business?

Year	Revenue	EBITDA	EBIT	CFO	EPS	FCFF	FCFE	FCF
2020	171,760	34,921	6,405	43,130	-0.75	38,058	40,146	27,455
2019	181,193	56,172	27,955	48,668	1.89	35,862	15,705	29,033
2018	170,756	54,526	6,096	43,602	2.85	28,734	34,480	22,351
2017	160,783	45,336	19,970	39,151	4.77	30,022	58,434	17,601
2016	163,783	46,801	24,347	39,344	2.10	20,240	14,298	16,936
5 Y Average	169,608	47,551	20,955	42,779	2.17	30,583	32,613	22,675
CAGR till 5Y Avg.	0.7%	0.32%	-2.96%	1.69%	0.68%	8.61%	17.93%	6.01%

Table 2: AT&T’s Growth Matrix, prepared by KhanZ Invest, data source: AT&T Annual Report

Liquidity: Can AT&T go bankrupt within next 12 months?

Year	Current Ratio	Quick Ratio	Cash Ratio
2020	0.82	0.70	0.15
2019	0.79	0.77	0.18
2018	0.80	0.77	0.08
2017	0.97	0.96	0.62
2016	0.76	0.73	0.11
5 Y Average	0.83	0.78	0.23
5 Y Median	0.80	0.77	0.15

Table 3: AT&T’s Liquidity Matrix, prepared by KhanZ Invest. data source: AT&T Annual Report

Solvency: How well AT&T can meet its Debt Obligations?

Year	Debt/Asset	Debt/Equity	LT Debt/Total Asset	Interest Coverage
2020	0.33	0.98	0.29	0.81
2019	030	0.81	0.27	3.32
2018	0.33	0.91	0.31	3.28
2017	0.37	1.16	0.28	3.17
2016	0.31	1.00	0.28	4.96
5 Y Average	0.33	0.97	0.29	3.11
5 Y Median	0.33	0.98	0.28	3.28

Table 4: AT&T’s Solvency Matrix, prepared by KhanZ Invest, data source: AT&T Annual Report

AT&T’s Dividend History & Performance during Recession

Great history of cash dividend payouts. AT&T is a dividend aristocrat.

Uninterrupted Period	Growth Streak	Recession Performance	Stopped Dividend
36 years	23 years	2000: Increased 2008: Increased 2020: Maintained	Never

Table 5: AT&T’s Cash Dividend History, prepared by KhanZ Invest. Data source: Yahoo Finance

Year	Annual Dividend	Net income Payout Ratio	FCF Payout Ratio	FCFE Payout Ratio
2020	2.40	-295.24%	57.74%	39.49%
2019	2.04	112.40%	53.81%	99.48%
2018	2.00	79.08%	68.53%	44.43%
2017	1.96	43.45%	72.70%	21.90%
2016	1.92	96.60%	74.02%	87.67%

Table 6: AT&T’s Cash Dividend Matrix, prepared by KhanZ Invest, data source: AT&T Annual Report

AT&T 5 year dividend CAGR is 1.65% which is par or even lower than the inflation. We are going to use this data in our DDM valuation model.

How AT&T’s Share Price Performed & How much share were Bought Back?

Year	Share Price	Number of Shares	Buyback	Buyback Yield
2020	29.39	7,621	0	0%
2019	39.16	7,621	0	0%
2018	28.5	7,621	-1,126	-14.77%
2017	39.06	6,495	0	0
2016	42.69	6,495	0	0
5 Y Average	35.76	7,171	-225	-2.95%

Table 7: AT&T’s Share Price & Buyback History, prepared by KhanZ Invest, data source: AT&T Annual Report

Step 3. What is AT&T’s Current Intrinsic Value?

How Market has been Pricing AT&T since last 5 years?

Year	P/FCCF	P/FCCE	P/FCF	P/CFO	P/E	P/BV	EV/EBITDA	EV/EBIT
2020	5.89	5.58	8.16	5.19	-39.19	1.17	11.17	60.90
2019	8.32	19.00	10.28	6.13	20.72	1.41	8.00	16.08
2018	7.56	6.30	9.72	4.98	10.00	1.07	7.12	14.89
2017	8.45	4.34	14.41	6.48	8.19	1.69	8.11	18.40
2016	13.70	19.39	16.37	7.05	20.33	2.11	8.44	16.22
5Y Average	8.78	10.92	11.79	5.97	4.01	1.49	8.57	25.30
5Y Median	8.32	6.30	10.28	6.13	10.00	1.41	8.11	16.22

Table 8: AT&T’s Valuation Multiples, prepared by KhanZ Invest, data source: AT&T Annual Report

What is the Intrinsic Value of AT&T based on 2020 financials?

The Following Scenario & Inputs are used to calculate Intrinsic Value

Market & Stock General Input
- USA Current Risk Free Rate = 2.5%. 10/30 Years USA’s Treasury yield is used
- USA Market Return = 9% Historical USA Market return is 8-10%. I took the mean
- Stock Beta = 0.74
- Cost of Equity / Discount Rate = 7.18% based on our customizable CAPM calculator
- Cost of Capital = 6.68/ based on our customizable WACC calculator
DCF w/ Exit Multiple Method Specific Input
- Used EBITDA = 47,551. AT&T’s last 5 years Average EBITDA is used. See table 2 above.
- Next 5 Years EBITDA Growth = 1%. used 1% because AT&T’s 5Y Revenue CAGR is 0.7% See table 2 above.
- Exit Multiple = 8.11. The 5Y mean value of AT&T’s EV/EBITDA is used
DCF w/ Terminal Growth Specific Input
- FCF Growth Rate = 6%. I used the Last 5Y CAGR of AT&T
- Terminal Growth = 3%. I think AT&T will be able to increase FCF with a par to Inflation
Benjamin Graham’s Intrinsic Value Model Specific Input
- EPS = 2.17. I used the last 5Y Average of AT&T’s EPS.
- EPS Growth Rate = 1%. I used the last 5Y CAGR
- AAA Corporate Bond Rate = 3.0%. You can find the rates on FRED website

DCF /w Terminal Growth	DCF /w Exit Multiple	DDM /w Gordon Growth	Graham Number	Graham Intrinsic Value	Peter Lynch’s Model
160.60	21.71	25.28	34.37	33.42	Very Overvalued

Table 9: AT&T’s Intrinsic Value Calculated using 5 different Model. Prepared by Zakaria Khan, used KhanZ Stock Price Calculator

In the table above, we clearly see that AT&T stock’s intrinsic value differs significantly. The range here is extreme, from 160.60 USD per share to 21.71 USD per share! which one is correct?

4. Paint The bigger Picture [Example, Update Soon]

Benchmark comparison with industry average

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ROA

ROE

ROIC

Net Mergin

D/E

Interest Coverage

Quick Ratio.

Current Ratio

P/E

P/BV

P/S

P/CF

EV/EBITDA

EV/EBIT

AT&T 5Y Avg

AT&T 5Y Median

Industry Median

Delta Median

Stock Price, How Market have been rewarding AT&T

Competitors (Verizon, T-Mobile) Valuations

5. Thesis: Bull & Bear Case

AT&T Inc. is an American multinational conglomerate holding company, Delaware-registered but it is headquartered at Whitacre Tower in Downtown Dallas, Texas. It is the world’s largest telecommunications company and the second largest provider of mobile telephone services. AT&T was founded on October 5, 1983.

Top level Revenue Structure

Economic Moat

industry Head/Tail winds.

Tail wind risk mitigation plan.

Management future growth plan.

Bad case, Good case & Best case valuations

Analysis & Article is by Zakaria Khan, Founder & CEO, KhanZ Invest

Disclaimer:

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