T Stock: Despite oversold, be careful with AT&T

Knife falling or buying from the bottom fisherman? This is the debate between investors and market experts when it comes to AT&T (NYSE:T). Down around 21% this year following a negative reaction from dividend investors to its restructuring plans, T-share on the one hand appears to be a deep value game.

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At least that’s if you assume that the company itself and the shares of Discovery (NASDAQ:DISCA), (soon Warner Bros. Discovery) that shareholders will receive will skyrocket in the years following the divestiture.

On the other hand, Ma Bell looks like a value trap. It is a stock that is cheap on paper, but in practice fails to unlock its underlying value due to poor management decisions. He may be trying to convince the investing public that his last bet will pay off. Still, given how much his past strategic moves have failed, it’s helpful to take a critical look at these latest plans.

What is my point of view? I lean for the old position. However, meeting him today may not be the best solution. Loosening it up slowly or waiting for another drop may be the best solution.

Why does T Stock continue to decline

With regard to AT&T restructuring, the focus has been on the company’s planned dividend cut. Certainly, this is not a surprise. Going back to the days of the Bell system, this was a stock of widows and orphans. A boring, slow-growing company with a consistently high dividend.

This, of course, went out the window. As a result of Morris Trust’s reverse transaction that will split its media and telecommunications unit, it will no longer pay $ 2.08 per share in annual dividends. As a result, the market revalued the T share. By calculations of my Investor place colleague Mark Hake, after the spin-off, the effective dividend yield at the future of the shares will probably be around 6.5%, in line with its average yield in recent years.

Coupled with pessimism about the prospects for Warner Bros. Discovery (which will have the ticker symbol WBD) investors have little confidence that this deal will help unlock hidden value, despite strong “sum of the parts” arguments put forward by commentators since the restructuring. has been announced.

Still, I wouldn’t assume that T and WBD stocks will provide average returns to investors. While far from certain, everyone could see a big price jump in the years following the divestiture.

Looking for a push in the years to come

Value investors who bought T shares over the past six months have seen their positions slowly sink under water. But after its 21% drop in price, it might get to a point where it has been oversold. At today’s prices (around $ 23.75 per share), the potential long-term rise could far outweigh the short-term decline.

This is mainly due to the return of the WBD title. Like a In search of the alpha A contributor recently argued that the growth of its Discovery + and HBOMax streaming platforms as well as the reduction in costs could result in a doubling of the value of media spinoff stocks by 2025, implying future value for WBD stocks. which equates to $ 10 per share in value to AT&T shareholders.

What about actions in the core business of telecommunications? These, too, could increase in value in the years to come. With the spin-off reducing its debt to $ 43 billion, plus the potential for growth through the deployment of 5G, investors could return to AT&T in time, giving it an EBITDA multiple more in line with its rival. Verizon Communications (NYSE:VZ). At today’s prices, Verizon’s enterprise value to EBITDA ratio is approximately 7.6x.

In the past 12 months, AT&T reported EBITDA of approximately $ 53 billion. Assuming that WarnerMedia segment EBITDA has remained stable, if we subtract its EBITDA for the year 2020 (around $ 8.9 billion), we get $ 44.1 billion EBITDA for the core business. Multiply that by 7.6x and the business is worth roughly $ 335.2 billion. Subtract his post-sale debt position ($ 166.5 billion) and add his cash position ($ 21.3 billion). After all of these background calculations, we end up with a net worth of about $ 190 billion, or about $ 36.60 per share.

Wait another drop before buying AT&T

Put together my estimates of potential value for AT&T Telecom and Media and what is trading today at around $ 23.75 per share could potentially be worth $ 36.60 per share.

However, don’t rule out the risk that it will drop further in the meantime. If DISCA stock continues to fall or the dividend cut is more severe than expected, stocks could drop below $ 20 per share before the restructuring is complete.

Despite this large gap between the stock’s current price and its potential value, you might still want to wait before buying T shares.

At the date of publication, Thomas Niel did not hold (directly or indirectly) any position in the securities mentioned in this article. The opinions expressed in this article are those of the author, subject to the publication guidelines of InvestorPlace.com.

Thomas Niel, collaborator of InvestorPlace.com, has been writing unique stock analysis for web publications since 2016.

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