Why AT&T Stock Looks Good To Rally Above $40
From late 2010 to late 2018, shares of telecommunications giant AT&T (NYSE:T) went nowhere. AT&T stock exited 2010 as a $30 stock. It exited 2018 with a $30 price tag, too. For comparison purposes, the S&P 500 doubled over that same stretch.
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In other words, for most of the 2010s, AT&T stock was a massive underperformer.
But AT&T’s fortunes changed in 2019. Amid investor enthusiasm regarding a forthcoming 5G boost to the company’s wireless business as well as the launch of a new streaming service in HBO Max, AT&T stock soared in 2019. By about 37%, marking its best annual return since 2006 and a sizable out-performance relative to the market (the S&P 500 rose less than 30% in 2019).
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This strength should continue into the back-half of 2020, mostly because 5G and streaming tailwinds will continue to boost investor sentiment and reinvigorate the company’s profit growth trajectory. As that happens, AT&T stock will keep moving higher.
How much higher? I like the stock to levels just north of $40. Here’s why.
Tailwinds Remain Robust For T Stock
AT&T stock will continue to move higher in 2020, in large part because robust 5G and streaming tailwinds will materially improve the company’s fundamentals.
On the 5G front, AT&T’s wireless phone business — which is the company’s bread-and-butter and generates most of the profits here — will get two big boosts in 2020. First, the introduction of multiple 5G smartphones in the back-half of 2020 will provide a lift to smartphone upgrade rates (which presently sit at record lows). As upgrade rates move higher, AT&T will see a rise in equipment revenue growth.
Second, the introduction of commercial 5G coverage simultaneously introduces quality tiers in what had become a commoditized wireless service industry (i.e. you will finally notice differences in coverage among various service providers). Because AT&T is a leader in 5G with a robust 5G network, these differences will be favorable for AT&T. The company won’t have to compete on price (as much) anymore. Instead, a focus on quality will enable the company to regain pricing power, providing a big boost to wireless profit margins in 2020.
Meanwhile, the launch of AT&T’s new streaming service, HBO Max, in the spring of 2020 should have a Disney (NYSE:DIS) impact on AT&T. The launch and growth of Disney+ turned Disney’s linear TV cord-cutting headwinds into streaming TV subscriber growth tailwinds, and caused a huge breakout in Disney stock. Similarly, the launch and growth of HBO Max will turn AT&T’s headwinds into tailwinds, and spark a big breakout in AT&T stock.
All in all, the AT&T growth narrative will only get better as we head deeper into 2020. As it does continue to improve, the rally in AT&T stock will stay alive.
Shares will Run Above $40
My numbers indicate that AT&T stock is worth holding until around $42 to $43. There are three major factors to that thesis.
A lot of investors buy AT&T for its dividend yield, so it makes logical sense that when the dividend yield gets too low, investors stop buying the stock. Historically speaking, the point at which the yield becomes “too low” is 4.8%. Whenever the yield has dropped to that level, shares have topped out and reversed course. At the current dividend rate, a 4.8% yield would equate to a ~$43 price tag for AT&T stock.
Similarly, AT&T stock has historically been maxed out when the trailing sales multiple shoots above 1.65. Sales in 2019 measured just north of $181 billion. They are expected to rise above $182 billion in 2020. Assuming a sales base in between those two numbers of roughly $182 billion, then a 1.65-times trailing sales multiple implies a ~$42 price tag for this stock.
Fiscal 2021 earnings per share estimates presently sit around $3.80. The historically average forward earnings multiple for AT&T stock, as well as the average forward earnings multiple across the telecommunications sector, is about 11. Based on that average multiple, $3.80 in projected fiscal 2021 earnings per share equates to a 2020 price target for the stock of ~$42.
Thus, all the numbers here point to the same price. That price is around $42, and that’s exactly where I think AT&T stock will trend over the next few quarters.
Bottom Line on AT&T Stock
Calendar 2019 was a record year for AT&T stock. Calendar 2020 won’t be as good. But, it’ll still be good, as 5G and streaming TV tailwinds converge to keep this stock’s red-hot rally alive for the next few quarters.
As of this writing, Luke Lango did not hold a position in any of the aforementioned securities.
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