Patience Is Required If You’re Going to Trade AT&T: Here’s the Play

On Wednesday morning, AT&T (T) , or “Telephone” as traders once referred to the company in the way they once referred to McDonald’s (MCD) as “Burgers”, released the firm’s fourth quarter financial results. These are wild. You may want to sit down.

For the three-month period ended December 31st, AT&T posted GAAP EPS of a loss of $3.20. Adjusted EPS printed at $0.61, which was a beat and compares to adjusted EPS of $0.56 for the year ago period. A total of $3.81 per share worth of adjustments were made, primarily ($3.57) for impairments, abandonments, and restructuring. In other words. “Telephone” kitchen-sinked the quarter.

The firm generated revenue of $31.343B. While that was good for year over year growth of 0.7%, the number did fall short of expectations. Operating expenses increased by slightly more than 100% year over year thanks to the already mentioned impairments. abandonments, and restructuring costs that amounted to $26.753B all by themselves.

The firm did add 656K postpaid wireless subscribers for the quarter, which beat consensus view for 645K. The firm also added 280K AT&T Fiber net adds to make 12 consecutive quarters of more than 200K net adds in that space. The firm’s mid-band 5G spectrum is now covering 150M people, twice AT&T’s original end of year target.

Fundies

Cash flow from operating activities from continuing operations (some mouthful) for the quarter came to $10.3B. Capital expenditures from continuing operations came to $4.2B, This puts free cash flow (at least from continuing operations) at $6.1B, which is impressive. This is what much of Wall Street is looking at this morning.

Turning to the balance sheet, the firm ended the period with a net cash position of $3.701B (down from $19.2B a year ago), and inventories of $3.123B (down small y/y). This brings current assets to $33.108B, which is down from $170.776B a year ago at this time. That number included $119.776B in assets from discontinued operations so, it’s actually a good thing.

Current liabilities ended the quarter at $56.173B, which is down from $106.23B. Last year’s number included $33.6B worth of liabilities associated with discontinued operations. The current print includes $$7.467B worth of short-term debt, down from $24.62B a year ago. The firm’s current ratio stands at 0.59, which quite honestly, stinks. But you do know that the firm is working on correcting its fundamentals after what was an atrocious period. The firm’s quick ratio stands at 0.53.

Total assets come to $402.853B, which includes $73.249B in “goodwill” and other intangibles. Seems high, but at 18% of total assets, this is not really out of line for a public facing company. Total liabilities less equity printed at $296.396B. This includes long-term debt of $128.423B. Remember, the firm has $3.701B worth of cash on the balance sheet. Ugh. As awful as this looks, the long-term debt print is down from $151.011B a year ago.

I’m not going to lie. I’d rather run through the Kodiak Bear exhibit at the Bronx Zoo wearing a bloody meat suit than be the CFO of AT&T. That said, there is improvement. The effort to improve this balance sheet will not be quick, nor easy.

Guidance

For the full year 2023, AT&T expects:

– Wireless service revenue growth of 4% or greater.

– Broadband revenue growth of 5% or greater.

– Adjusted EBITDA growth of 3% or greater.

– Capital Investment of roughly $24B. This would be in line with 2022.

– Adjusted EPS of $2.35 to $2.45 that will include a negative impact of $0.25 from higher non-cash pension costs related to higher interest rates and a higher effective tax rate of 23% to 24%.

My Thoughts

There are definitely some good things here. The improvement in the firm’s underlying fundamentals is one of them, even if the underlying fundamentals themselves are quite terrible. The dividend remains the most attractive part of owning the stock, dishing out $1.11 a year in quarterly installments. That’s a yield of close to 5.8%. Can the dividend be sustained?

On operating cash flow from continuing operations that leads to what is actually a robust free cash flow from continuing operations, I would say that yes they can. For now. The firm has refocused itself on its core business and has jettisoned its non-core, distracting, money-losing businesses. That’s positive.

An interested investor would not necessarily be wrong, but they would have to be patient. Seven times forward looking earnings is not cheap with debt like that overhanging the firm and it will not be cheap for quite some time.

I would not initiate AT&T up 4% in what is a weak morning tape. That said, given the dividend, the shares could be worthy of speculation. On the next dip. The share are already 38% off of their October lows. A 20% move up from pivot here would take the shares to about $23.40. To me, that means that in the short to medium-term, the risk-reward proposition has been majority used up.

Thinking for myself, maybe I wait for a test of the 200 day SMA (simple moving average). Maybe I go out three months and sell $19 puts for about $0.45. That’s a net basis of $18.55 if one does get tagged. In the meantime, the premium paid replaces the dividends not received.