Stock rebounds Friday as analysts say latest results shouldn’t have come as a great surprise
AT&T Inc. bulls were out to defend the telecommunications stock Friday in the wake of a historic post-earnings selloff.
Shares of AT&T (T) were rallying 3.3% in Friday’s session after suffering a 10.4% decline in Thursday trading that marked the company’s second-worst percentage decline on record and one not seen at this magnitude in over two decades.
Was AT&T’s first-quarter earnings report, which brought a miss on free cash flow and slower but still in-line subscriber growth, worthy of a share-price decline only outmatched by one other drop in the telecommunication’s giant’s nearly four-decade history as a public company? It wasn’t, according to BofA Securities analyst David Barden.
AT&T’s “2nd biggest down move in 40 years” came “on nothing,” he said in a note to clients.
Yes, the company’s sizable free-cash-flow miss “raises understandable questions,” Barden acknowledged, especially since AT&T has had to cut its outlook on the crucial metric in the past. But after speaking with the company and going through some math, he still sees the company’s $16 billion-plus free-cash-flow target for the year as achievable.
The stock was “understandably down” Thursday, but Barden said “there is no fundamental explanation” for a drop of such historic proportions, as “the core wireless and consumer wireline businesses performed well in [the first quarter] and 2023 guidance is unchanged.”
“[Hedge-fund] positioning is the only explanation in our view,” he added, while maintaining a buy rating and $25 price objective.
HSBC Securities analyst Adam Fox-Rumley said the “severely negative market reaction” to AT&T’s results offers an opportunity for investors to buy the dip, as he upgraded the stock to buy from hold and kept a $21 target price.
“Fair? We think not,” Fox-Rumley wrote of Thursday’s stock move. “The market, in our view, has over-reacted to this release. 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 [key performance indicators] 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.”
He’s “sympathetic to nervousness about poor cash generation in [the first quarter of 2023], but equally, the company had guided to a weaker start of the year (citing the same factors on the [first-quarter] results call as stated in the 2023 outlook in January) alongside the fact that material swings in working capital are frequently seen in the telecoms industry.”
Morgan Stanley’s Simon Flannery agreed that the stock move was “somewhat surprising given that AT&T reiterated full-year guidance and had previously noted that [free cash flow] would be back-half loaded as in 2022, and that wireless adds (while healthy) were trending below [first quarter 2022] levels.”
Still, he kept an equal-weight rating, writing that the stock could “remain pressured in the near term.”
“We would not be surprised to see investors take a wait-and-see approach in coming months until there is more clarity on the outlook for the second half,” he noted, given the importance of free cash flow to AT&T’s dividend sustainability.