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Is It Time to Exit AT&T Stock?

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Analysts expect a limited upside potential from AT&T (NYSE:T) stock going forward. They have given AT&T stock a median target price of $40.50 compared to its current market price of $38.09. The target price suggests an estimated upside of 6.3% for the next 12 months.

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AT&T stock

Among the 30 analysts tracking AT&T, seven recommend a “buy,” six recommend a “strong buy,” 15 recommend a “hold,” and two recommend a “sell” as of Tuesday. MoffettNathanson analyst Craig Moffett downgraded AT&T’s rating to “sell” from “neutral” in November. MoffettNathanson maintained the stock’s target price of $30. The analyst thinks that the wireless carrier won’t achieve the growth forecast.

According to a LightReading report, “Craig Moffett outlined the reasons for his doubts, holding that growth at AT&T’s mobile business will have a difficult, if not impossible, time making up the difference as other units of AT&T, including its Entertainment Group and wireline business service unit, struggle.”

The report also said, “On the surface, the numbers don’t sound challenging, especially the forecast of 1%-plus revenue growth. But the more we poke at our estimates, the harder it is for us to imagine they can be achieved.”

In fiscal 2020, AT&T expects its consolidated revenue to grow 1%–2% YoY (year-over-year). The company expects its non-GAAP EPS to be $3.60–$3.70 this year. Similarly, analysts expect AT&T’s adjusted EPS to grow 1.7% YoY to $3.60 in 2020. However, Wall Street expects AT&T’s revenue to be $182.17 billion, which is slightly lower than the company’s estimate.

AT&T projected its three-year (2020–2022) revenue CAGR at 1%–2%. The company’s management also expects its adjusted EPS to be between $4.50 and $4.80 by 2022.

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AT&T’s Entertainment Group

Moffett highlighted that AT&T’s Entertainment Group segment will start 2020 with nearly 15% fewer customers compared to the beginning of 2019. The reduction is mainly due to significant pay-TV customer losses over the last few quarters.

AT&T lost 2.49 million net pay-TV customers in the first nine months of 2019 compared to 795,000 net losses in the first nine months of 2018. The company also lost a net of 446,000 over-the-top customers in the first nine months of 2019.

According to a LightReading report, “Although AT&T believes that the worst of those losses is over, no one expects that part of the business to return to growth. Meanwhile, AT&T’s broadband business is also in decline despite some subscriber growth from its fiber-to-the-premises platform.”

Elliott Management’s stake in AT&T stock

Last year, the activist investor Elliott Management disclosed a $3.2 billion stake in AT&T. Elliott Management is pressuring the company to divest non-core assets like DIRECTV and focus on its core telecom business. The hedge fund thinks that AT&T stock could be worth $60+ if the company follows its suggestions. However, AT&T’s management stated that the company’s pay-TV business DIRECTV isn’t for sale. Read Why AT&T Might Not Sell DIRECTV to learn more.

Stock’s valuation

AT&T stock is among the best performing telecom stocks. The stock has risen about 24.4% in the last 12 months as of Tuesday. T-Mobile (NYSE:TMUS) and Sprint (NYSE:S) stocks have returned 17.5% and -22.0%, respectively, during the same period.

On January 14, AT&T stock fell 0.03% and closed the trading day at $38.09. The stock hit a new 52-week high in November 2019. The stock is trading 4.1% below its 52-week high of $39.70 and around 31.7% above its 52-week low of $28.92. AT&T stock closed with a dividend yield of 5.46% on Tuesday.

AT&T has forward PE ratios of 10.58x for 2020 and 10.09x for 2021. Compare that with an expected 1.7% adjusted EPS increase in 2020 and the stock might appear expensive.

Read Jim Cramer Says AT&T Stock Is Worth Buying, AT&T Declares Dividend and Share Buyback Plan, and Can HBO Max Lead AT&T Stock Higher in 2020? to learn more.

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