Telecom and technology services company AT&T Inc. (T) reported mixed fiscal 2023 first-quarter results. The company’s operating revenues were $30.14 billion, up 1.4% year-over-year. This increase is primarily driven by higher Mobility, Mexico, and Consumer Wireline revenues, partly offset by lower Business Wireline revenues.

Moreover, T showcased consistent 5G and fiber customer additions. The company reported 424,000 postpaid phone net adds during the first quarter and 11 straight quarters with more than 400,000 net adds with continued low postpaid phone churn. In addition, its first-quarter AT&T Fiber net adds were 272,000 and, notably, 13 consecutive quarters with more than 200,000 net adds.

“Our teams take pride in connecting more people to greater possibility through 5G and fiber,” said John Stankey, AT&T’s CEO. “We’re winning thanks to a proven and sustainable playbook that centers on simple, customer-centric experiences. As a result, we’re adding high-value customers, and when they choose AT&T, they stay with us.”

Despite a modest increase, the telecom company’s revenue fell short of Wall Street’s expectations of $30.27 billion. T’s net income attributable to common stock was $4.23 billion or $0.58 per share, compared to $4.81 billion or $0.66 per share in the prior-year period.

In addition, the company’s free cash flow (FCF) was $1 billion, a decline of 64% from a year earlier, missing estimates of $2.61 billion according to 18 analysts polled by Visible Alpha.

“It was not all bad news, and some aspects of AT&T’s operations came in above estimates, but it is the free cash flow figure that seems to have caused all the damage, given that it points to likely lower dividend payouts going forward,” said Stuart Cole, head macro economist at Equiti Capital.

Although the telecom company pays a high-yielding dividend to its shareholders, its weaker-than-expected free cash flow in the first quarter signal that it could lower dividend payments in the future. T pays $1.11 as dividends annually, yielding 7.27% on the current share price. Its four-year dividend yield is 6.96%.

Shares of T have plunged 21.6% over the past six months and 26.1% over the past year to close the last trading session at $15.27.

Here is what could influence T’s performance in the upcoming months:

Positive Recent Developments

On July 6, T and Boldyn Networks, a leading infrastructure provider in the United States and internationally, announced a partnership to boost 5G mobile coverage for millions of San Francisco Municipal Transportation Agency (SFMTA) riders in San Francisco. This partnership should benefit T significantly.

On June 7, T and Cisco (CSCO) announced new solutions to enhance connectivity and advance the calling landscape for hybrid workforces. AT&T Cloud Voice with Webex Go² would be available for all Webex Calling users from Cisco partners in the United States later this year.

The companies are also working to bring SD-WAN connectivity with add-on services such as 5G and broadband to deliver an optimized experience for enterprises of all sizes. This partnership might boost T’s growth and profitability.

Also, on May 11, T and BlackRock Inc. (BLK), through a fund managed by its Diversified Infrastructure business, closed their joint venture (JV) to form Gigapower, LLC. plans to Gigapower plans to provide a state-of-the-art fiber network to internet service providers and other businesses in parts of select metro areas throughout the country. This innovative JV should bode well for T.

Mixed Financials

For the first quarter that ended March 31, 2023, T’s total operating revenues grew 1.4% year-over-year to $30.14 billion. Its operating income rose 8.4% from the year-ago value to $6 billion. Also, the company’s adjusted EBITDA increased 3.9% from the prior year’s quarter to $10.59 billion.

However, the company’s net income decreased 13.8% year-over-year to $4.45 billion, while its earnings per share attributable to common stock were $0.58, down 12.1% year-over-year. As of March 31, 2023, its cash and cash equivalents were $2.82 billion, compared to $3.70 billion as of December 31, 2022.

Mixed Analyst Estimates

Analysts expect T’s revenue to increase 1.2% year-over-year to $29.99 billion for the second quarter that ended June 2023. However, the consensus earnings per share estimate of $0.62 for the same period indicates a decline of 5.3% year-over-year.

The company’s revenue and EPS for the fiscal year (ending December 2023) are expected to increase 1.1% and decline 5.5% year-over-year to $122.08 billion and $2.43, respectively. For the fiscal year 2024, analysts expect T’s revenue and EPS to increase 1.1% and 2.3% year-over-year to $123.46 billion and $2.49, respectively.

Mixed Valuation

In terms of forward non-GAAP P/E, T’s 6.28x is 59.4% lower than the 15.46x industry average. Its forward EV/EBITDA of 6.65x is 21.1% lower than the 8.42x industry average. Also, the stock’s forward Price/Cash Flow of 2.86x is 67.6% lower than the 8.82x industry average.

But the stock’s forward non-GAAP PEG of 7.38x is significantly higher than the industry average of 1.63x. Its forward EV/Sales multiple of 2.33 is 27.6% higher than the industry average of 1.83.

Mixed Profitability

T’s trailing-12-month gross profit margin of 58.37% is 17.7% higher than the 49.59% industry average. Its trailing-12-month EBITDA margin of 36.15% is 100.3% higher than the 18.05% industry average. In addition, the stock’s trailing-12-month levered FCF margin of 7.91% is 7.7% higher than the industry average of 7.35%.

However, T’s trailing-12-month net income margin of negative 7.52% compares to the 2.81% industry average. The stock’s trailing-12-month ROTA of negative 2.27% is lower than the industry average of 1.48%.

POWR Ratings Show Uncertainty

T has an overall rating of C, which equates to a Neutral in our POWR Ratings system. The POWR Ratings are calculated by taking into account 118 different factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. T has a C grade for Value and Quality, in sync with its mixed valuation and profitability, respectively. Also, the stock has a C grade for Sentiment, consistent with its mixed analyst estimates.

T is ranked #6 out of 18 stocks in the Telecom – Domestic industry.

Beyond what I have stated above, we have also given T grades for Growth, Stability, and Momentum. Get all T’s POWR ratings here.

Bottom Line

Telecom company T posted continued 5G and fiber subscriber gains during the first quarter of fiscal 2023. While the company’s revenue slightly increased, it fell short of analyst expectations. Also, the weaker-than-expected free cash flow is concerning as it could lower dividend payments going forward.

Given T’s deteriorating financials, mixed valuation and profitability, and near-term bleak growth outlook, it could be wise to wait for a better entry point in this telecom stock.

Stocks to Consider Instead of AT&T Inc. (T)

Given its uncertain short-term prospects, the odds of T outperforming in the weeks and months ahead are compromised. However, there are many industry peers with much more impressive POWR Ratings. So, consider these three A-rated (Strong Buy) or B-rated (Buy) stocks from the Telecom – Domestic industry instead:

Ooma, Inc. (OOMA)

Spok Holdings, Inc. (SPOK)

InterDigital Inc. (IDCC)

What To Do Next?

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T shares were trading at $15.30 per share on Tuesday morning, up $0.03 (+0.20%). Year-to-date, T has declined -12.97%, versus a 16.12% rise in the benchmark S&P 500 index during the same period.

About the Author: Mangeet Kaur Bouns

Mangeet’s keen interest in the stock market led her to become an investment researcher and financial journalist. Using her fundamental approach to analyzing stocks, Mangeet’s looks to help retail investors understand the underlying factors before making investment decisions. More...

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