Ronald Martinez
Elevator Pitch
I continue to rate AT&T Inc.’s (NYSE:T) shares as a Buy.
In my prior September 13, 2022 write-up for AT&T, I determined that “T’s stock price should go back to the $20 price level or higher.” Following my previous update for T, AT&T’s stock price has gone up by +11.3% from $17.18 (price at publication of my earlier article) to close at $19.12 as of November 25, 2022. During this same period, the S&P 500 declined by -0.3%.
I turn my attention to AT&T’s 2023 forecast and outlook with the current article. T should be in a good position to achieve higher free cash flow and further share price appreciation next year. AT&T’s recent management comments at an investor conference and its revised 2022 financial guidance send positive signals about the company’s performance in the coming year. As such, I decide to leave my Buy rating for AT&T unchanged.
AT&T Stock Key Metrics
It is relevant to analyze AT&T key metrics relating to the company’s most recent quarterly financial results and its updated full-year management guidance, prior to evaluating how T will perform next year.
With regards to AT&T’s recent quarterly financial performance, T’s actual Q3 2022 non-GAAP adjusted earnings per share or EPS of $0.68 exceeded Wall Street analysts’ consensus bottom line projection of $0.62 by a significant +10%.
Furthermore, AT&T’s postpaid phone net adds (T’s key operating metric) amounted to approximately 708,000 in the third quarter of this year, beating the sell-side’s consensus estimate of 564,000 by a substantial +26% as per S&P Capital IQ’s consensus data.
In terms of the company’s near-term prospects, there are three items relating to AT&T’s FY 2022 financial guidance as per its Q3 2022 financial results press release that are worth highlighting.
Firstly, T raised the company’s 2022 non-GAAP EPS guidance from $2.42-$2.46 previously to a minimum $2.50 now. Secondly, AT&T left its existing 2022 wireless service revenue growth guidance of +4.5%-5.0% unchanged, but it highlighted that it should hit “the upper end” of this +4.5-5.0% range. Thirdly, the company noted that it should “achieve, or surpass” its other “financial commitments (guidance) for the year” including metrics like total revenue growth, non-GAAP adjusted EBITDA, and free cash flow.
In a nutshell, AT&T’s key metrics were excellent, which gives investors the confidence that the stock should perform well in 2023.
What Are AT&T Catalysts To Watch For?
In my view, there are a few re-rating catalysts for AT&T that are worth watching out for.
I previously mentioned in my mid-September 2022 article that one “key catalyst for AT&T” is “above-expectations free cash flow for 2023.”
In this section, I touch on the other potential catalysts for AT&T.
One of the catalysts is higher-than-expected dividends for T.
The market consensus expects AT&T to deliver a full-year dividend per share of $1.12 for both fiscal 2023 and FY 2024, which is the same as what the company paid out for FY 2022. If T offers any indications in 2023 that it might raise dividends in 2024, this could push AT&T’s share price up.
Notably, T noted at the company’s recent Morgan Stanley’s (MS) European Technology, Media & Telecom Conference on November 17, 2022 that “do we raise the dividend” is one of the key capital allocation issues it will consider after its net debt-to-EBITDA ratio goes down to 2.5 times. According to consensus data taken from S&P Capital IQ, AT&T’s net debt-to-EBITDA metric is expected to decline to 2.57 times by fiscal 2024. Assuming AT&T continues to achieve good progress in its deleveraging efforts, it is likely that T’s management could make comments in 2023 that imply a return to dividend growth in 2024.
Another catalyst is AT&T’s continued outperformance against its key rival, Verizon (VZ).
I highlighted earlier that AT&T delivered an impressive postpaid phone net adds of 708,000 for the third quarter of 2022. In contrast, VZ only generated postpaid phone net adds of around 8,000 in the most recent quarter. Looking ahead, Barclays’ (BCS) analyst Kannan Venkateshwar takes the view that it will be “tough for Verizon to dig out of its present challenges” anytime soon as noted in an October 24, 2022 Seeking Alpha News article.
It is noteworthy that AT&T still trades at a discount to Verizon, despite T’s superior performance in the recent quarter. As per S&P Capital IQ’s valuation data, the market currently values AT&T and Verizon at consensus forward next twelve months’ normalized P/E multiples of 7.5 times and 7.8 times, respectively. If AT&T can continue to perform better than its key competitor VZ, T is in a good position to narrow the valuation gap between the two, and even trade at a higher P/E multiple than Verizon in time to come.
Separately, it is also necessary to assess the change in analyst sentiment for AT&T, which is a meaningful driver of its future share price performance. In the subsequent section, I discuss about how sell-side analysts are thinking about T’s shares.
What Do Analysts Think Of T Stock?
My opinion is that analysts are becoming increasingly positive about AT&T’s stock.
In the last three months, 24 of the 31 Wall Street analysts covering T’s shares increased their respective FY 2022 bottom line projections for the company. In comparison, just two of the analysts decided to lower their 2022 EPS forecasts for AT&T over the same period.
Similarly, the average sell-side analyst rating for AT&T went up from 3.47 as of August 30, 2022 to 3.55 as of November 27, 2022. A rating of 1 represents a Strong Sell, while a score of 5 is equivalent to a Strong Buy.
In conclusion, I think that the sell-side analysts have a favorable view of T stock, and this is backed up by the change in the consensus earnings estimates and analyst ratings for the stock.
What Is The Forecast For 2023?
Earlier, I forecasted that AT&T’s share price can reach $20, and T’s last done stock price of $19.12 as of November 25, 2022 is just -4% below my prior target price. Moving ahead, I forecast that T’s stock price will go up to $23.13 or higher next year, which translates into an upside potential of +21%. My updated price target of $23.13 for T is calculated based on a 9.0 forward P/E multiple applied to its consensus FY 2023 normalized EPS of 2.57.
As discussed in this article, I am of the view that the three catalysts for AT&T in 2023 are higher-than-expected free cash flow in the following year, an indication of a dividend hike for 2024, and better-than-expected performance as compared to VZ.
At the recent Morgan Stanley’s European Technology, Media & Telecom Conference in mid-November 2022, AT&T offered expectations of an improved set of results in 2023 vis-a-vis 2022. Specifically, T highlighted the larger-than-expected expansion of its “wireless subscriber base”, “higher (than expected) ARPUs”, “transformation (costs) savings” and lower “5G costs”, in response to a question about its 2023 outlook.
Taking into account T’s Q3 performance, its 2022 guidance and recent management comments, I expect the three re-rating catalysts for T to be realized, and I am confident in my 2023 forecast for AT&T. Specifically, the market consensus sees T’s free cash flow increasing from $14 billion in FY 2022 to more than $18 billion (source: S&P Capital IQ) for FY 2023.
Is T Stock A Buy, Sell, or Hold?
T stock remains as a Buy-rated stock. I am of the view that both AT&T’s financial and stock price performance should be better next year. T’s free cash flow should grow substantially in 2023; while T’s P/E multiple should re-rate on expectations of dividend growth for 2024 and its continued outperformance against Verizon.
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