AT&T (NYSE:T) | Telecommunication

Price & Charts of T

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?

YearsEarnings YieldROAROEROICNet Margin
2020-2.5%-1.2%-3%-1.08%-3.13%
20194.83%2.52%6.88%4.10%7.67%
201810%3.64%9.99%5.39%11.34%
201712.21%6.63%20.74%9.74%18.34%
20164.92%3.21%10.46%5.38%7.92
5 Y Average5.88%3%9.01%4.71%8.43%
5 Y Median4.92%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?

YearRevenueEBITDAEBITCFOEPSFCFFFCFEFCF
2020171,76034,9216,40543,130-0.7538,05840,14627,455
2019181,19356,17227,95548,6681.8935,86215,70529,033
2018170,75654,5266,09643,6022.8528,73434,48022,351
2017160,78345,33619,97039,1514.7730,02258,43417,601
2016163,78346,80124,34739,3442.1020,24014,29816,936
5 Y Average169,60847,55120,95542,7792.1730,58332,61322,675
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?

YearCurrent RatioQuick RatioCash Ratio
20200.820.700.15
20190.790.770.18
20180.800.770.08
20170.970.960.62
20160.760.730.11
5 Y Average0.830.780.23
5 Y Median0.800.770.15
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?

YearDebt/AssetDebt/EquityLT Debt/Total AssetInterest Coverage
20200.330.980.290.81
20190300.810.273.32
20180.330.910.313.28
20170.371.160.283.17
20160.311.000.284.96
5 Y Average0.330.970.293.11
5 Y Median0.330.980.283.28
Table 4: AT&T’s Solvency Matrix, prepared by KhanZ Invest, data source: AT&T Annual Report

Step 2. How well AT&T is sharing Profits?

AT&T’s Dividend History & Performance during Recession

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

Uninterrupted PeriodGrowth StreakRecession PerformanceStopped Dividend
36 years23 years2000: Increased
2008: Increased
2020: Maintained
Never
Table 5: AT&T’s Cash Dividend History, prepared by KhanZ Invest. Data source: Yahoo Finance
Year Annual DividendNet income Payout RatioFCF Payout RatioFCFE Payout Ratio
20202.40-295.24%57.74%39.49%
20192.04112.40%53.81%99.48%
20182.0079.08%68.53%44.43%
20171.9643.45%72.70%21.90%
20161.9296.60%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?

YearShare PriceNumber of Shares BuybackBuyback Yield
202029.397,62100%
201939.167,62100%
201828.57,621-1,126-14.77%
201739.066,49500
201642.696,49500
5 Y Average35.767,171-225-2.95%
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?

YearP/FCCFP/FCCEP/FCFP/CFOP/EP/BVEV/EBITDAEV/EBIT
20205.895.588.165.19-39.191.1711.1760.90
20198.3219.0010.286.1320.721.418.0016.08
20187.566.309.724.9810.001.077.1214.89
20178.454.3414.416.488.191.698.1118.40
201613.7019.3916.377.0520.332.118.4416.22
5Y Average8.7810.9211.795.974.011.498.5725.30
5Y Median8.326.3010.286.1310.001.418.1116.22
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
DCF /w Terminal GrowthDCF /w Exit MultipleDDM /w Gordon Growth Graham NumberGraham Intrinsic ValuePeter Lynch’s Model
160.6021.7125.2834.3733.42Very 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

ROAROEROICNet MerginD/EInterest CoverageQuick Ratio.Current RatioP/EP/BVP/SP/CFEV/EBITDAEV/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:

Spread the love