Shares of AT&T Inc. fell sharply on Thursday after the telecom giant cut its free cash flow forecast 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 second quarter was actually good. Here’s why.”
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The management team hasn’t earned Piecyk points for its handling of cash forecasting over the past few months. Piecyk recalled reported problems with AT&T’s old free cash flow forecast in March, namely a “liberal use of rounding, an aversion to simply stating a cash tax estimate for presumably political reasons, and finally the use of working capital and DirecTV distributions in their free-flow cash flow presentation.
AT&T said Thursday that a variety of trends contributed to the lower forecast, including slower payment times for customers and higher-than-expected cash outlays related to its own device purchases from vendors.
“It’s surprising that the stock is selling so strongly on working capital, but management is largely to blame,” Piecyk wrote. “Free cash flow forecasts shouldn’t be so complex, and investors shouldn’t factor the fleeting benefits of working capital into their calculations.”
Elsewhere, however, he saw positives in the report. AT&T’s free cash flow metric is important to investors because the company pays a large dividend, but Piecyk doesn’t think the company will need to cut its dividend any further.
“Its core business is performing well and the 5G investment cycle should end,” he wrote. “In 2023, we believe AT&T can generate over $12 billion in free cash flow. The full-year benefit of the dividend cut means that $12 billion covers approximately $8.2 billion of expected dividend payments,” before taking into account working capital impacts or approximately $3 billion. dollars of planned DirecTV distributions.
Piecyk also had an optimistic view of the company’s wireless performance, especially in light of investor debate over pricing and the company’s promotional strategies.
“The price increase on its rate plans did not increase churn and helped deliver ARPU of postpaid phones [average revenue per user] growth for the first time in over two years,” he wrote. “It also sends a signal to the wireless industry that there is pricing power in this market.”
Piecyk sees additional scope 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 new and existing subscribers,” but noted that the company was able to boost wireless earnings before interest, taxes, depreciation and amortization. (Ebitda) during the last quarter. Additionally, the company’s upgrade rate fell from a year earlier, suggesting that the upgrade cycle is stretching.
As AT&T struggles in its wireline business, Piecyk was impressed with the performance of the company’s fiber business, with a net increase of 25% year over year. “This further validates our industry assumptions regarding the target market share for fiber overbuilders and the increased share that can be achieved in traditional markets,” he wrote.
Overall, Piecyk sees opportunities for AT&T moving forward, especially given what the latest numbers indicate about pricing actions. “We continue to believe that wireless carriers can raise prices and lower costs,” he wrote, including through a potential reduction in device subsidies.
Piecyk prices the stock as a buy with a target price of $26.