AT&T Inc.’s shares fell sharply Thursday after the telecommunications giant cut its free-cash-flow forecast for the year, but one 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.”
management team didn’t win points from Piecyk for its handling of cash-flow forecasting over the past few months. Piecyk recalled flagging issues with AT&T’s older free-cash forecast back in March, namely a “liberal use of rounding, aversion to simply stating a cash tax estimate for presumably political reasons, and ultimately the use of working capital and DirecTV distributions in their free-cash-flow presentation.” AT&T said Thursday that various trends contributed to the lowered forecast, including slower customer payment times and higher-than-expected cash expenses related to its own device purchases from suppliers. “It’s startling that the stock would sell off this steeply on working capital, but management is largely to blame,” Piecyk wrote. “Free-cash-flow guidance should not be this complex and investors shouldn’t include ephemeral working capital benefits in 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 that the company will need to cut its dividend any more. “Its core business is performing well and the 5G capex cycle should be winding down,” he wrote. “In 2023, we believe AT&T can generate over $12 billion of free-cash flow. The full-year benefit of the dividend cut means that $12 billion covers ~$8.2 billion of expected dividend payments,” before taking into account working-capital impacts or about $3 billion in anticipated DirecTV distributions. Piecyk also had an upbeat view on the company’s wireless performance, especially in light of investor debate about the company’s pricing and promotional strategies. “The increased pricing on its rate plans did not spike churn and helped deliver post-paid 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 additional room for the company to grow ARPU as the year progresses. He acknowledged that “[i]nvestors 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 grow wireless earnings before interest, taxes, depreciation, and amortization (Ebitda) in the latest quarter. In addition, the company’s upgrade rate fell relative to a year earlier, suggesting that the upgrade cycle is stretching out. While AT&T is feeling some pain in its business wireline business, Piecyk was impressed by the performance of the company’s fiber business, with net adds up 25% relative to a year before. “This further validates our industry assumptions of target market share for fiber overbuilders and the increased share that can be obtained in legacy markets,” he wrote. Overall, Piecyk sees opportunities for AT&T moving forward, especially given what the latest numbers indicated about pricing actions. “We continue to believe wireless operators can increase price and cut costs,” he wrote, including through a potential curtailing of device subsidies. Piecyk rates the stock a buy with a $26 target price.