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AT&T (T) Affirms 2022 View, Offers Long-Term Growth Targets

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As AT&T Inc.’s T game-changing deal with Discovery, Inc. DISCA for the divesture of its WarnerMedia business nears completion, the top management of the former recently debriefed investors about its future growth strategy and the broader corporate objective post spin-off. While affirming the guidance for 2022, AT&T also shed some light on its business transformation initiatives to create long-term value for shareholders and offered an outlook of the standalone company for 2023 and beyond.

AT&T expects the merger of its WarnerMedia assets with Discovery to be completed by second-quarter 2022. The transaction aims to spin off the carrier’s media assets and merge them with the complementary assets of Discovery. Post completion of the deal, AT&T will receive $43 billion in a combination of cash and debt securities and will own 71% of the new entity, while Discovery will own the remainder. The transaction is expected to enable the carrier to trim its huge debt burden and focus on core businesses. The separation of the media assets is likely to offer the company an opportunity to better align its communications business with a focused total return capital allocation strategy.

The carrier emphasized that it strives to become the leading broadband provider in the country, focusing on 5G and fiber network connectivity, as the industry continues to benefit from a healthy uptick in demand. The company is aiming to profitably increase its postpaid subscriber base leveraging its network quality and market penetration capabilities. Riding on its go-to-market strategy, AT&T expects to witness healthy subscriber momentum with the migration of customers to its unlimited plans.

While optimizing operations, the company is also aiming to increase efficiencies to lower operating costs while focusing on 5G and fiber-based broadband connectivity. The company expects to connect 3.5-4 million additional locations with fiber each year as it continues to expand its fiber builds in metro areas in order to significantly increase its existing fiber footprint to more than 30 million locations by the end of 2025. In addition, AT&T intends to deploy 120 MHz of mid-band spectrum to considerably expand its 5G coverage, which currently spans more than 16,000 cities and towns, covering more than 255 million people. The company expects that 75% of its network footprint will be either served by fiber or 5G, which will likely half its legacy copper services exposure. These simplification initiatives are likely to drive additional cost savings while creating new revenue opportunities.

In order to upgrade its existing infrastructure facilities for 5G and fiber deployment, AT&T plans to invest $24 billion each in 2022 and 2023, and about $20 billion starting from 2024. As a standalone company, it intends to pay more than $8 billion in dividends to shareholders, which represents a payout of about 40% against the expected free cash flow of $20 billion in 2023. It further plans to reduce its net debt to adjusted EBITDA ratio to the 2.5 range by the end of 2023.

For full-year 2022, AT&T reiterated its earlier guidance and expects adjusted earnings to be in the range of $2.42 to $2.46 per share (excluding WarnerMedia and Xandr). Revenues are likely to grow by low single digits, while adjusted EBITDA is likely to be within $41 billion to $42 billion. Pro forma free cash flow for 2022 is expected to be in the vicinity of $16 billion. For 2023, adjusted earnings are anticipated to be in the range of $2.50 to $2.60 per share on revenue growth of low single digits. Adjusted EBITDA is likely to be within $43.5 billion to $44.5 billion with pro forma free cash flow of $20 billion.

AT&T is increasingly focusing on its customer-centric business model to attract and retain customers for a lower churn rate. The company is witnessing healthy momentum in its postpaid wireless business with increased adoption of higher-tier unlimited plans. This, in turn, is expected to result in year-over-year growth in wireless customers with unlimited tariff plans.

The stock has lost 22.5% in the past year compared with the industry’s decline of 10.3%. Nevertheless, we remain impressed with the inherent growth potential of this Zacks Rank #3 (Hold) stock.

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A better-ranked stock in the industry is Clearfield, Inc. CLFD, sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Clearfield delivered an earnings surprise of 50.7%, on average, in the trailing four quarters. Earnings estimates for the company’s current year have moved up 102.7% since March 2021. Over the past year, Clearfield has gained a solid 73.3%.

Sierra Wireless, Inc. SWIR, carrying a Zacks Rank #2 (Buy), in another key pick. It has a long-term earnings growth expectation of 12.5% and delivered an earnings surprise of 58%, on average, in the trailing four quarters.

Over the past year, Sierra Wireless has gained 2.7%. Earnings estimates for the current year for the stock have moved up 68.8% since March 2021. The company continues to launch innovative products for business-critical operations that require high security and optimum 5G performance.

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