Shares of AT&T Inc (T) have returned 5.2% over recent months. This shows that the company is outperforming the US telecom industry gain of 4.5% at the same time. The company will report third-quarter earnings on October 23 before the market opens.
Analysts are expecting AT&T EPS to be 0.94. However, this is 0.51% less than the prior-year quarter. Yet, the stock points to higher prices based on an analysis of the chart. Moreover, options markets have a 5% move in October priced in.
Why AT&T’s valuation is appealing
The stock is trading near its median over the last 10 years P/E (price-to-earnings) multiple of 15.57. Also, it looks undervalued versus its sector’s median P/E of 18.66. AT&T stock’s P/E has been as high as 50.78 and as low as 5.5, with a median of 14.5. The stock’s P/E multiple could go back to the sector’s median levels of about 18. If this happened, the shares could climb to around $63.72, using consensus earnings estimates of $3.54 in 2019.
The company offers a dividend yield of $5.5. Also, it has increased its dividends for the past 17 years. Simply Wall St also confirms the stock is undervalued. And, AT&T has a future cash flow of $74.04 compared to the $37.19 closing price.
Looking at the daily chart, we can see what is going on with AT&T. The technical chart is bullish, pointing the stock surge in the near term. Currently, the stock has held firm at technical support around the price of $37.00. It’s also trading 5% off the 52-week high reached in September.
If the stock can hold above $37.00 and start to surge, it would not surprise me to see the stock soar close to its previous high, which is around $38.75. Also, the chart shows that the money flow index value of 35.87 is below its relative strength index of 55.60. This shows that AT&T stock still has room to grow in the near term.
The implied volatility for the options at the $37.50 strike price, which expires on October 25, stands at 25.83%. This means that investors are expecting an event that may cause modest movement in one direction or the other.
Looking at the October 25 options, I see a bid/ask for the $37.50 CALL option of $0.50/$0.52. Also, I see a bid/ask for the $37.50 PUT option of $1.36/$1.38. Keep in mind that the options strike closest to the previous T closing price of $37.19. We can calculate the expected price move using the mid prices of these options:
1.37 (37.50 Put) + 0.51 (37.50 Call) = 1.88/37.19 = 5%
As seen above, the options imply that AT&T stock could rise or fall by ~5% by the October expirations from the $37.50 strike price using the long straddle strategy. This would place the stock in a trading range of $35.24 to $38.95 by the expiration date.
Moreover, the calls at the $37.50 strike price outweigh the put options about 13:1 with 3173 open calls to 253 open puts. A buyer of the calls would need the stock rise to $38.02 by the expiration date, a gain of about 2.5% from AT&T stock’s current price.
My recommendation for AT&T stock
Currently, with T at levels of $37.19 per share, I believe it’s a “Buy.” I find a positive or neutral outcome more likely, given the appealing valuation, optimistic option bets, and the favorable technical chart.
However, regarding the downside, if negative quarterly results send the stock down, I don’t expect AT&T to drop below its recent low of $36.50. According to TipRanks, T is a “Moderate buy” with an average PT (price target) of $37.40, representing a 0.54% upside.