AT&T Inc. shares fell sharply Thursday after the telecommunications giant cut its forecast for free cash flow for the year, but an analyst said the latest report wasn’t all bad.
In fact, LightShed Partners analyst Walt Piecyk titled his research note: “AT&T’s Q2 was actually good. Here’s why.”
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The management team did not win points from Piecyk for its handling of cash flow forecasts in recent months. Piecyk recalled flagging issues with AT&T’s older free cash forecast back in March, namely a “liberal use of rounding, reluctance to simply provide a cash tax estimate for presumably political reasons, and finally the use of working capital and DirecTV distributions in their free cash flow presentation .”
AT&T said Thursday that various trends contributed to the reduced forecast, including slower customer payment times and higher-than-expected cash outlays related to purchasing proprietary devices from vendors.
“It is startling that the stock would sell off this sharply on working capital, but management is largely to blame,” Piecyk wrote. “Free cash flow guidance should not be so complex, and investors should not include volatile working capital benefits in their calculations.”
Elsewhere, however, he saw positive aspects of the report. AT&T’s free cash flow calculation is important to investors because the company pays a large dividend, but Piecyk doesn’t think the company needs to cut the dividend anymore.
“The core business is performing well and the 5G capex cycle should wind down,” he wrote. “By 2023, we believe AT&T can generate over $12 billion in free cash flow. The full-year benefit of the dividend cut means $12 billion covers ~$8.2 billion of expected dividend payments,” before factoring in the impact of working capital or about $3 billion in expected DirecTV distributions.
Piecyk also had a positive view of the company’s wireless performance, especially in light of the investor debate over the company’s pricing and marketing strategies.
“The increased prices on the price plans did not increase churn and helped deliver postpaid phone ARPU [average revenue per user] growth for the first time in over two years,” he wrote. “This also sends a signal to the wireless industry that there is pricing power in this market.”
Piecyk sees further room for the company to increase ARPU as the year progresses.
He acknowledged that “[i]Investors are understandably concerned that AT&T is buying revenue growth with handset subsidies to both new and existing subscribers,” but noted that the company was able to increase wireless earnings before interest, taxes, depreciation and amortization (Ebitda) last quarter. In addition, the company’s upgrade rate fell compared to a year earlier, which suggests that the upgrade cycle is stretching out.
While AT&T is feeling some pain in its internet business, Piecyk was impressed with the performance of the company’s fiber business, which saw a net increase of 25% over the previous year. “This further validates our industry assumptions about target market share for fiber overbuilders and the increased share that can be achieved in legacy markets,” he wrote.
Overall, Piecyk sees opportunities for AT&T going forward, especially given what the latest numbers indicated about price action. “We continue to believe wireless carriers can raise prices and cut costs,” he wrote, including through a potential curtailment of device subsidies.
Piecyk rates the stock a buy with a target price of $26.