AT&T could ‘turn the corner’ on a key metric this year

AT&T cut its 2022 outlook last summer, lowering its 2022 target to $14 billion from $16 billion, a move it attributed in part to the economic climate, and also to stronger-than-expected customer growth, which was affecting AT&T’s own payments for devices.

AT&T “should see an upward inflection” in free-cash-flow growth during 2023, according to Wells Fargo analyst Eric Luebchow, “even if it’s unlikely to deliver on its previous guide for $20 billion.” Growth in both free-cash flow and earnings before interest, taxes, depreciation, and amortization (Ebitda) could “turn the corner” this year, he noted.

Luebchow estimates that AT&T will generate $16.9 billion in free-cash flow this year, ahead of the FactSet consensus, which calls for $16.2 billion. He said that some on the buy side may be expecting AT&T to guide free-cash flow below $16 billion.

One factor to watch will be the impact of AT&T’s recently announced joint venture with BlackRock, which is focused on commercial fiber outside of AT&T’s traditional footprint.

“We do acknowledge that there could be some modest capital outlays in 2023 from its recent BlackRock fiber JV which could impact FCF,” Luebchow wrote, though he said that “a capital partner for higher-cost locations out-of-footprint is likely the right approach strategically longer-term.”

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Morgan Stanley analyst Simon Flannery chimed in that AT&T “has already targeted FCF growth in 2023 from a $14 billion base in 2022 driven by wireless growth, cost cutting and lower interest expense offset by higher cash taxes and lower DTV [DirecTV] contribution,” but he’s “interested in learning more details about their expectations.”

He’s also watching the company’s fiber plans, “both within region after a slowdown in late 2022 and out of region in conjunction with Blackrock.” And he’ll be looking to see whether AT&T offers more information on its timeline for reaching its 2.5-times leverage target, which could give the company flexibility to restart stock buybacks.

Oppenheimer’s Timothy Horan noted that consensus expectations call for free-cash-flow growth in excess of 10% this year, though he has a more cautious view. Horan said that consensus estimates look “too high given many headwinds even if T is aggressive in managing expenses” through areas like headcount, retail stores, and subsidies.

AT&T’s Wednesday earnings report will come a day after Verizon Communications Inc.
VZ,
-0.93%
delivers its own results. T-Mobile US Inc.
TMUS,
-0.52%
disclosed earlier this month that it saw 927,000 net postpaid phone additions in the fourth quarter, though it since revealed that it suffered from yet another data breach.

Shares of AT&T finished 2022 down 0.9%, with that slight decline marking its best annual performance in three years. AT&T’s stock outperformed Verizon’s on the year but lagged T-Mobile’s.

Analysts tracked by FactSet are fairly mixed on AT&T’s stock: Of the 27 who cover the name, 11 have buy ratings, 12 have hold ratings, and four have sell ratings.