Since announcing it would merge its Warner Media content empire into Discovery (NASDAQ:DISCA) in May, AT&T (NYSE:T) stock is down nearly 28%. T stock has had a small bounce in this month as bargain hunters are hoping the company can return to prominence once it’s fully focused on 5G wireless.
Just don’t buy it for that reported 8% yield. Once the WarnerDiscovery deal goes down, so does the dividend.
What you’ll be left with will be revenue of maybe $135 billion and earnings of $3.16 a share according to analysts. If it can hit those figures, AT&T stock is a “buy” at its current $23 a share.
The question is whether it can hit those figures.
Long Time Coming
At its Dec. 7 closing price, AT&T is worth just $164.8 billion. That sounds super cheap for a company that brought in $171 billion in 2020 revenue, and $43 billion in operating cash flow. But there was $177 billion in long-term debt on the books at the end of September. That makes the enterprise value of the company $343 billion.
Optimists may note that the company has earned $2.07 a share in just the first three quarters of 2021. The price-to-earnings ratio is inflated by last year’s fourth quarter loss, nearly $14 billion or $1.95 a share. The loss came from writing down the value of DirecTV, which was sold in August to private equity.
DirecTV was one of three hammer blows to earnings, most of which originated with former CEO Randall Stephenson. The satellite TV giant had cost $67 billion. Its value when sold was $16.75 billion.
The purchase of Time Warner for $85.4 billion is now widely seen as a mistake. AT&T has also lost wireless market share since T-Mobile (NASDAQ:TMUS) merged with Sprint.
The Road to Wireless
The WarnerDiscovery deal will eventually be done, CEO John Stankey reassured shareholders in a Dec, 6 letter. Objections by some Democrats pale in comparison to the full-throated Justice Department fight against Time Warner’s acquisition, a fight the government lost in court.
AT&T will get $43 billion in cash and 71% of the shares in the new company. If Discovery CEO David Zaslav can deliver growth, AT&T shareholders will benefit, either directly through their AT&T stock or through shares in the spin-off.
That is still a big if. The company’s streaming operation, HBO Max, faces huge competition from Netflix (NASDAQ:NFLX), Amazon (NASDAQ:AMZN) and Walt Disney (NYSE:DIS), which each have over 100 million subscribers. HBO Max has fewer than 70 million. The cable operations are also suffering from cord-cutting, while the CNN News operation deals with a scandal that forced it to fire its top-rated anchor.
The WarnerDiscovery deal will eventually cut AT&T revenue by about $30 billion and debt to $130 billion. That’s less than the $166 billion in debt held by Verizon Communications (NYSE:VZ) at the end of September, but a lot more than T-Mobile’s $99 billion.
AT&T needs all the financial firepower it can get. It spent $23 billion on the recent C-Band spectrum auction and is doubling down on building out 5G services. AT&T’s capital budget for 2021 is estimated at $21 billion.
The Bottom Line on T Stock
If I had any confidence in AT&T management, I’d buy T stock in a heartbeat.
The problem is I don’t. The only reason to buy the stock in the short-term is that it’s so cheap you figure some other fool will buy it for more.
In the longer run, AT&T is still gambling that its spectrum hoard, and the machine internet, will deliver growth. That’s not a bad bet. This is a stock for a young, conservative investor speculating on that long term.
On the date of publication, Dana Blankenhorn held a long position in AMZN. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Dana Blankenhorn has been a financial and technology journalist since 1978. Just in time for the holidays he has a collection of COVID-19 stories at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or tweet him at @danablankenhorn. He writes a Substack newsletter, Facing the Future, which covers technology, markets, and politics.