On Tuesday, Wolfe Research changed its stance on AT&T (NYSE:T), upgrading the stock from Peer Perform to Outperform, setting a new price target of $21.00. The firm highlighted the telecom giant's performance, noting that despite a 5.6% return including dividends over the last three years and 3.2% over the past five years, the current market conditions present a favorable opportunity for investors to reevaluate the stock as a long-term investment.
Wolfe Research pointed out that the telecom sector, particularly with regards to broadband, is showing signs of stability and growth, driven by Fiber and Fixed Wireless Access (FWA) advancements. The firm also mentioned that as investment in 5G technology decreases, financial leverage is shifting in a way that benefits equity over debt.
The upgrade comes with a positive outlook on AT&T's fundamental progress. AT&T has seen improvements in customer churn rates, which now align with its peers, thanks to three years of retention investments. The company has also managed to maintain its postpaid phone subscriber base amid competitive pressures from rivals like Charter and Verizon (NYSE:VZ).
Additionally, AT&T's consumer wireline segment is expected to grow, with the potential for significant margin improvement due to the shutdown of legacy networks. With the anticipated reduction in capital expenditures and debt, the firm suggests that AT&T's payout and leverage ratios will support an increase in equity value.
Wolfe Research concluded that AT&T's forward enterprise value to EBITDA (EV/EBITDA) ratio of 6 times is below that of its peers and its own historical average. Along with a sustainable free cash flow (FCF) yield above 12% and a dividend yield of 6.6%, the stock offers a margin of safety and an undemanding path to upside. The new price target reflects a potential total return of 31.6%.
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