AT&T Stock Is Undervalued: What Should Investors Do?

Last week, AT&T stock (T) continued its bullish trend. The stock ended the week with a substantial gain of 5.5%. The S&P 500 Index rose 1.5% while the Dow Jones Industrial Average rose 1.4%. AT&T stock also touched a 52-week high of $39.02 on November 1, later closing a little lower at $38.95.

The reason for the rise in AT&T stock

Last week, AT&T managed to impress Wall Street with its third-quarter earnings results. The telecom company reported third-quarter non-GAAP EPS of $0.94, beating Wall Street consensus estimate by $0.01. It also delivered total revenue of $44.6 billion, which missed analyst estimates by about $400 million.

On AT&T’s third-quarter earnings conference call, CEO Randall Stephenson announced a three-year capital allocation plan. The program includes share buyback, dividend growth, reduce leverage, and a portfolio review. The telecom company announced the capital allocation program after Paul Singer’s hedge fund, Elliott Management, raised concerns.

Stephen Luczo, Seagate Technology’s chairman, was elected as AT&T’s board of directors, effective immediately, according to a Reuters report on November 1.

Elliott Management’s stake in AT&T

AT&T stock has been growing since Elliott Management revealed a $3.2 billion state in T stock on September 9. The activist investor has been pressuring AT&T to sell unnecessary assets such as DIRECTV and Mexican wireless operations.

The company has also been losing traditional video customers due to intense competition from direct-to-consumer streaming services like Netflix and Amazon. In the third quarter, AT&T lost 1.2 million pay-TV customers versus 346,000 net losses in the year-ago quarter.

For 2020, AT&T anticipates monetizing up to $10 billion worth of assets to reduce its high debt level. Elliott asked the telecom giant to stop making acquisitions and reduce costs by $5 billion. The hedge fund also suggested making management changes. Elliott Management thinks AT&T stock is undervalued and could be worth $60+ per share in the next two years.

HBO Max

AT&T’s WarnerMedia segment intends to launch an over-the-top video streaming service named HBO Max in May 2020 for $14.99 per month. The new service is likely to launch with about 10,000 hours of content. On AT&T’s Q3 2019 earnings call, CEO Randall Stephenson said, “This is a product that’s going to be very different from anything else that you’ve seen in the market so far. This is not Netflix, this is not Disney, this is HBO Max, and it’s going to have a very unique position in the marketplace.” To learn more, check out Can HBO Max Lead AT&T Stock Higher in 2020?

On November 1, Apple launched its own streaming service, Apple TV+, at $4.99 per month. Meanwhile, Disney is launching Disney+ at $6.99 per month later this month.

Subscriber metrics

In the third quarter, AT&T lost 217,000 postpaid net subscribers, versus 231,000 net losses in the third quarter of 2018. However, the company added 101,000 postpaid phone net customers in Q3 2019, compared to 67,000 net additions in Q3 2018.

On average, analysts expected that AT&T would add about 60,000 postpaid phone net subscribers in the third quarter. T-Mobile (TMUS) added 754,000 postpaid phone net subscribers in the third quarter.

AT&T also added 227,000 net prepaid customers in the third quarter, compared to 570,000 net prepaid customer additions in the third quarter of 2018. The company’s prepaid subscribers rose 6.1% year-over-year to 17.7 million as of September 30. To learn more, see AT&T on the Defensive after Loss of Subscribers.

Is AT&T stock undervalued?

Of the 29 analysts tracking AT&T in November, six have recommended a “strong buy” while eight have recommended a “buy” for the stock. About 14 analysts have recommended a “hold,” and one analyst has recommended a “sell.”

On November 4, AT&T had a consensus 12-month target price of $38.17, which represents a -2.0% return on investment over the next 12 months.

Peers’ ratings

Of the 21 analysts tracking T-Mobile in November, 81% have recommended some form of a “buy” rating on the stock. On November 4, T-Mobile had a consensus 12-month target price of $89.79, which represents an 8.9% return on investment over the next 12 months.

Of the 18 analysts tracking Sprint (S) in November, 5.6% have recommended some form of a “buy” rating. On November 4, Sprint had a consensus 12-month target price of $6.65, which represents a 5.6% return on investment over the next 12 months.

AT&T’s stock performance

On November 1, AT&T stock was trading at $38.95, which represented a 45.3% increase from its 52-week low of $26.80. AT&T has risen around 36.5% year-to-date.

AT&T stock is approaching overbought territory, based on its 14-day RSI score of 63. The stock is trading 3.0% above its 20-day moving average, 4.7% above its 50-day moving average, and 10.0% above its 100-day moving average.

Sprint and T-Mobile are up 8.3% and 29.7%, respectively, year-to-date. To learn more about their pending merger, see T-Mobile Provides an Update on Its Merger with Sprint. And for more free analysis of AT&T, check out AT&T’s Dividend Yield Gets More Attractive.