Investors had sold off AT&T stock ahead of its third-quarter results, with a 10-day losing streak of over 7% going into the report. That pushed shares to their lowest close in nearly a decade.

The results on Thursday morning suggest the recent negativity may have been overdone. AT&T (ticker: T) stock was up 5% at 12:41 p.m., versus a 0.1% decline for the S&P 500. But both AT&T bulls and bears will both have plenty to point to in the report.

The telecom and entertainment conglomerate reported as-expected earnings and stronger-than-forecast revenues for the third quarter, despite pandemic-induced pain at its television and movie properties. AT&T’s networks did well: the company delivered much more robust wireless and internet subscriber growth than even the most optimistic analyst had predicted. But declines continued elsewhere—think DirecTV—and there remain numerous hefty demands on AT&T’s cash flow.

The company earned an adjusted 76 cents per share in the third quarter, versus 94 cents in the same period in 2019 and equal to analysts’ forecast. It beat on the revenue line, at $42.3 billion—compared with Wall Street’s $41.6 billion, down from $44.6 billion a year earlier. Adjusted Ebitda, or earnings before interest, taxes, depreciation, and amortization, just missed at $13.2 billion, versus the $13.7 billion forecast and $15.1 billion last year.

AT&T estimates that Covid-19 related impacts subtracted 21 cents per share from its earnings, which would have otherwise come in 3 cents higher than a year ago. The biggest impacts were felt at WarnerMedia, where closed movie theaters, disrupted television production, and delayed sports events hit revenue and profits. Sales fell 10% year over year, to $7.5 billion, while operating income dropped 38%, to $1.8 billion.

HBO and HBO Max—an expanded streaming service introduced in May—reached 38 million combined subscribers in the U.S. at the end of the third quarter, up from roughly 34 million at its launch. That’s ahead of the 36 million that AT&T had targeted for the end of the year, and on the way to its 50 million-subscriber forecast by 2025.

AT&T wireless phone business remained the workhorse of the company’s portfolio. Revenues were $17.9 billion, up 1% year over year, although operating profits slipped 1%, to $5.7 billion. The company added a massive 1.1 million postpaid subscribers—meaning wireless customers who receive a monthly bill. Analyst estimates had ranged from a 100,000-subscriber gain to a 353,000-subscriber loss. Prepaid subscribers rose by 245,000, ahead of the 94,000 forecast.

AT&T’s Entertainment Group was a tale of two trends in the third quarter. Satellite and cable TV customers continued to cancel, with a loss of 590,000 DirecTV, U-verse, and AT&T TV subscribers. Broadband internet subscriber growth was strong, however, as people stuck at home upgraded their connections for work and entertainment. AT&T added its best-ever 357,000 fiber subscribers last quarter, offsetting a loss in slower-speed connections to deliver 158,000 total broadband net adds.

That didn’t make up for the declines at DirecTV, however, and Entertainment Group revenues came in 10% lower than a year earlier, at $10.1 billion, while operating income dropped 28%, to $800 million. Business Wireline posted an unsurprising result, with revenues and operating income each down about 2.5%, to $6.3 billion and $1.2 billion, respectively.

“It’s pretty hard to poke a hole in this earnings report,” says Jim Boothe, CIO at Brentview Investment Management, a dividend-growth investor. “The weak area, [DirecTV,] even did better than expected. The wireless business was very strong, it had more than 1 million adds. If anything, this earnings report shows the sustainability of the dividend, which had a lot of investors concerned.”

On Thursday’s earnings call, CFO John Stephens emphasized AT&T’s commitment to its dividend, currently yielding a whopping 7.8% annually. Management now expects to show at least $26 billion in free cash flow in 2020—including $8.3 billion in the third quarter—and a dividend payout ratio in the high-50% range

AT&T paid down $2.9 billion of debt in the quarter, and its net-debt-to-adjusted Ebitda ticked up slightly to about 2.7 times at the end of the third quarter.

“With Mobility stable while the media businesses hemorrhage, this print offers little to stem concerns that a weakening competitive position and pandemic-related dislocations increasingly strain the company’s financial position,” wrote Bernstein analyst Peter Supino on Thursday morning. “We believe the share price fairly reflects the highly uncertain outlook, and we are watching Mobility as the competitive environment evolves.”

Supino rates AT&T stock at the equivalent of Hold, with a $32 price target.

Stocks of rivals Verizon Communications (VZ) and T-Mobile US (TMUS) have lost 4% and gained 43%, respectively, since the start of 2020, while AT&T has lost 27% after dividends. The S&P 500 has returned 8%.

Source Publication: Barron's
By: Nicholas Jasinski
Link: https://www.barrons.com/articles/at-t-earnings-were-good-enough-to-end-a-10-day-losing-streak-heres-why-51603372024