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Stock Analyst Update

AT&T Avoids Distraction, Continues to Gain Momentum

We continue to like AT&T’s strategic position and its network investment plans, which we expect will deliver improving revenue and profit growth over the next several years.

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AT&T (T) delivered generally solid telecom results for its first quarter, putting it on pace to at least meet management’s 2022 growth expectations. Evaluating profitability and cash flow is more difficult, given heavy investment in the outgoing WarnerMedia business, the complexity of the various transactions AT&T has undertaken recently, 3G wireless network shutdown costs, and typical seasonal pressures. Management remains committed to delivering $16 billion of free cash flow this year and $20 billion in 2023 under the more conservative calculation it has adopted. Our fair value estimate, recently adjusted to reflect the Warner spinoff, remains $25 per share. We continue to like AT&T’s strategic position and its network investment plans, which we expect will deliver improving revenue and profit growth over the next several years.

Adjusted for the Warner spinoff, DirecTV transaction, and Latin American asset sale, total revenue (now roughly two thirds wireless, with most of the remainder enterprise and consumer fixed-line services) increased 2.5% year over year. Wireless service revenue growth accelerated to 4.8% year over year, well ahead of management’s “at least 3%” 2022 target, on strong postpaid phone customer growth in recent quarters. That strength continued as AT&T added 691,000 postpaid phone customers during the quarter, up from 595,000 a year ago, extending the impressive turnaround in the business. After two years of torrid industrywide growth, postpaid customer additions will eventually have to match population growth more closely, but AT&T hasn’t yet seen any sign of falling demand.

Average revenue per postpaid phone customer was also surprisingly strong (though perhaps buoyed by the 3G shutdown), declining only 0.2% versus a year ago despite heavy promotional credits, which are amortized against revenue. Segment EBITDA declined 1.8% year over year but would have increased about 2% absent 3G network shutdown costs.

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Michael Hodel does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.