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What’s Driving AT&T Stock to New Highs?

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AT&T (T) stock touched a 52-week high of $35.98 on September 5, later closing a little lower at $35.89. AT&T has generated a 12.1% return in the last 12 months.

The telecom giant has a market cap over $262 billion. AT&T stock has rallied more than 11.8% since it reported its second-quarter financial results on July 24.

AT&T stock: Trends and market cap

Year-to-date, AT&T stock has gained 25.8% through September 5. Telecom stocks T-Mobile (TMUS) and Sprint (S) had returned 22.4% and 16.2%, respectively, YTD. On September 5, T-Mobile stock rose 0.3% and closed at $77.83. On the day, Sprint stock closed at $6.76, which was unchanged from its previous closing price.

AT&T stock has fallen 9.6% in the last three years but has risen 4.0% in the last five years. It is currently trading 0.3% below its 52-week high of $35.98 and 33.9% above its 52-week low of $26.80. With a 14-day RSI (relative strength index) score of 66, AT&T stock is approaching the overbought zone.

The increases in AT&T’s revenues and earnings have driven its market cap growth. Its revenue rose from $163.79 billion in 2016 to $170.76 billion in 2018. Its earnings per share have risen at a compound annual growth rate of 8.7% in the last five years.

Is AT&T stock overvalued?

AT&T has a forward PE ratio of 10.1x for 2019. For 2020, this ratio is 9.9x. Its adjusted earnings per share are expected to rise 1.1% in 2019 and 1.7% in 2020. In our view, AT&T stock looks overvalued, considering its expected earnings growth in 2019 and 2020.

Financial results

AT&T reported adjusted EPS of $0.89 in the second quarter, a decline of 2.2% year-over-year. In the second quarter of 2018, the company reported adjusted EPS of $0.91. AT&T’s Q2 2019 adjusted EPS met the Wall Street estimate of $0.89.

AT&T reported revenues of $44.96 billion in the second quarter, which implies 15.3% YoY growth. In the second quarter of 2018, the company reported revenues of $38.99 billion.

However, the company’s revenues beat analysts’ estimate of $44.85 billion in Q2 2019. The company reported consolidated adjusted EBITDA of $15.0 billion, a year-over-year rise of 13%.

Subscriber metrics

In the second quarter, AT&T lost 154,000 postpaid net customers, compared to 73,000 net additions in the second quarter of 2018. However, the company added 72,000 postpaid phone net customers in Q2 2019 compared to 51,000 net additions in Q2 2018.

On average, Wall Street expected that AT&T would gain 27,000 postpaid phone net customers in the second quarter. T-Mobile added 710,000 postpaid phone net customers in the second quarter, while Sprint shed 128,000 postpaid phone net customers.

AT&T also added 341,000 net prepaid customers in the second quarter, compared to 453,000 net prepaid customer additions in the second quarter of 2018. The company’s prepaid subscribers rose 8.5% YoY to 17.6 million on June 30.

In the second quarter, AT&T reported postpaid phone churn rate of 0.86%, compared with 0.82% in the second quarter of 2018. This increase may be a cause of concern, as T-Mobile and Sprint have been focusing on attracting customers from their rivals.

A higher churn rate is negative for telecom companies, as it suggests they might have higher subscriber acquisition costs. As a result, the churn rate may impact their operating margins.

AT&T lost 778,000 traditional US pay-TV subscribers on a net basis during the second quarter—more than its first-quarter net losses of 544,000. AT&T’s traditional US pay-TV subscriber count fell YoY to 21.58 million in the second quarter from 23.64 million in the second quarter of 2018. The YoY reduction in the US pay-TV subscriber base is primarily due to the growing popularity of over-the-top services and the cord-cutting trend.

Analysts’ recommendations on AT&T stock

Of the 28 analysts covering AT&T, 15 recommended a “buy” for the stock, one recommended a “sell,” and 12 recommended a “hold.”

Analysts have an average 12-month target price of $35.12 for AT&T stock, with a median target price of $37. As a result, AT&T is trading at a discount of 3.1% to median analyst estimates.

AT&T stock: Technical levels

Based on the closing price on September 5, AT&T stock was trading 2.6% above its 20-day moving average of $34.98, 5.1% above its 50-day moving average of $34.14, and 9.2% above its 100-day moving average of $32.88.

On September 5, AT&T stock closed near its Bollinger Band upper-range level of $35.87. This value indicates that the stock has been overbought.

Revenue and earnings expansion

In 2018, AT&T reported adjusted EPS of $3.52 on revenue of $170.76 billion. Analysts expect AT&T’s sales to rise 7.0% year-over-year to $182.78 billion in 2019 and 0.3% year-over-year to $183.25 billion in 2020.

The company’s adjusted earnings per share are expected to increase 1.1% to $3.56 in 2019 and 1.7% to $3.62 in 2020. Its adjusted earnings per share are expected to rise at a compound annual growth rate of 2.2% over the next five years.

AT&T is planning to deploy a nationwide 5G network by mid-2020. Read AT&T 5G Services Progressed, Reached 21 Cities and AT&T’s Streaming Business, 5G, Debt, and More to learn more.

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