AT&T, Inc. (T) is one of the largest telecommunications companies in the U.S., with more than 5.9 million U.S. wireless net adds as of December 31. While the tech and wireless communications industry soared for most of last year, T has declined 20.9% over its trailing 12-months. However, the stock hasn’t lost value in 2021 and is up 0.6% year-to-date.

T’s recent industry-first deployment of 5G and multi-access edge computing facilities across the U.S. Department of Veterans Affairs’ Puget Sound Health Care System increased in February.

While  market optimism regarding a V-shaped economic recovery and nationwide 5G deployment have been driving the stock’s gains this year, T’s pre-COVID performance is concerning. Despite being one of the biggest names in the wireless and connectivity industry, T has declined 21% over the past three years, and 24.4% over the past five years. To retain its position as a Dividend Aristocrat, the company has amped up its borrowings over the years and is currently drowning in debt. With debt amounting to 4.18 times its trailing 12-month free cash flow, T’s ability to repay its debt in the near term is uncertain.

Here’s what we think could influence T’s performance in the near term:

Mixed Profitability

T’s trailing 12-month gross profit margin of 53.47% is 4.9% higher than the industry average 50.98%. Its trailing 12-month EBIT margin of 14.94% is 48.4% higher than the industry average 10.07%. But its  levered free cash flow margin and ROTC of 21.17% and 4.26%, respectively, compare favorably with the respective industry averages, and its trailing 12-month CAPEX/sales of 9.13% is more than double the industry average.

However, the company has failed to generate profits over the past year and its trailing 12-month net loss is $5.18 billion.

High Debt and Insufficient Cash Flows

T’s trailing 12-month total debt is $182.98 billion. It has a trailing 12-month total debt to equity margin of 102.09%. The company’s total debt has been rising for the past three years.

However, T does not  possess adequate cash flows to balance its high debt margins. It has a trailing 12-month cash balance of $9.77 billion. It generated net operating cash flows and levered free cash flows of $43.13 billion and $36.36 billion, respectively, over the past year.

Trading at a Discounted Valuation

In terms of non-GAAP forward p/e, T is currently trading at 9.16x, 54.7% lower than the industry average  20.24x. Its forward price/sales ratio of 1.19 is 39.6% lower than the industry average  1.97.

In addition, T’s forward price/cash flow and ev/EBIT of 4.65x and 14.41x, respectively, compare favorably with the industry averages.

Consensus Price Target and Ratings Indicate Marginal Upside

Analysts expect T to hit $29.85 soon, indicating some potential upside. The stock has an average broker rating of 1.92, which indicates favorable analyst sentiment.

However, of 32 Wall Street analysts that rated the stock, 17 rated it Hold.

POWR Ratings Reflect Uncertainty

T has an overall rating of C, which equates to Neutral in our proprietary POWR Ratings system. It is calculated by considering 118 different factors, with each factor weighted to an optimal degree.

The stock has a B grade of B for Stability, and C for Growth, Value, Momentum, Sentiment and Quality. T has a beta of 0.73, which is in sync with its Stability grade. While the stock is relatively undervalued compared to its peers, its non-GAAP forward PEG of 6.81x is 243.2% higher than the industry average  1.98x. The company’s weak profitability and momentum justifies its Quality and Momentum grades, respectively.

Of the 26 stocks in the D-rated Telecom – Domestic industry, T is ranked #11.

You can check out the top-rated stocks in this industry here.

Bottom Line

T’s market dominance in the telecommunications and wireless communications industry defines it as  a “too big to fail” company. However, the company’s high debt and weak cash flows raise concerns regarding its ability to meet its debt obligations. While T’s status as a Dividend Aristocrat and its forward dividend yield of 7.24% make it appealing to  investors, the company’s inadequate cash flows raise questions regarding the sustainability of its dividend payouts. This, combined with a global semiconductor shortage, which is postponing nationwide 5G deployment, makes T’s growth trajectory uncertain. Hence, we think it  advisable to wait for a better entry  point before investing in the stock.

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T shares were trading at $29.38 per share on Friday afternoon, up $0.46 (+1.59%). Year-to-date, T has gained 3.96%, versus a 0.58% rise in the benchmark S&P 500 index during the same period.

About the Author: Aditi Ganguly

Aditi is an experienced content developer and financial writer who is passionate about helping investors understand the do’s and don'ts of investing. She has a keen interest in the stock market and has a fundamental approach when analyzing equities. More...

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