By Investing.com Staff
AT&T (NYSE:T) fell over 10% Thursday following weaker revenue on slower subscriber growth and a free cash flow "miss". Today, however, a handful of analysts are telling clients to use that weakness as a buying opportunity.
HSBC analysts upgraded the stock to Buy on Friday while maintaining his $21 price target, saying the "severely negative market reaction to lower subs growth and weak 1Q23 FCF generation offers an opportunity, in our view." They said growth in subscribers, mobile service revenue, and EBITDA are "still solid" and the fiber upgrade appears to be the right strategy. While noting T needs to deliver on FCF, the analysts said the guidance is "far from unreachable."
The analysts think yesterday's negative market reaction was attributed to two factors:
(i) the absolute slowdown in post-paid phone net adds to +424K vs +691K in 1Q22 and consensus expectation of +407K; and
(ii) FCF generation (company definition) of $1 billion for the quarter vs consensus of $2.6B and guidance (which was reiterated) of $16B-plus for 2023.
"The market, in our view, has over-reacted to this release," HSBC analysts simply stated. "We acknowledge that part of a stock-picker’s job is to call the beauty contest, and plainly the market remains acutely focused on mobile KPIs in particular. But a slowdown in market momentum has been widely flagged (by all operators) for months, and AT&T’s absolute growth in mobile subs remained solid. Moreover, the notion that the stock is ‘priced for perfection’ at 7x PE, 12.6% FCFe, and 6.4% d/y (2023e) also appears farfetched, in our view."
Deutsche Bank analysts echoed HSBC's sentiment, telling clients the FCF "confusion" is a buying chance. The analysts reiterated a Buy rating and $23 price target.
They elaborated that "consensus mis-modeled the cadence of the annual FCF guide, despite management calling out at our MIT conference in late February that FCF would be seasonally low in 1Q (similar to last year) due to: (1) payments to handset vendors for devices sold to customers in seasonally high 4Q, (2) incentive bonus payments to employees (which were accrued during 2022 and paid in 1Q), (3) payables related to their capex build due in 1Q, and (4) employee severance payments." They said while FCF was about $250 million below their estimate it is not a material difference in the context of the "at least $16B" full-year guidance.