We are maintaining our fair value estimate at $35 a share, and shares still appear overvalued today.
By Alex Zhao, CFA | 04-26-17 | 01:30 AM | Email Article

 AT&T Inc performed poorly in the first quarter of 2017, as total revenue declined by about 3% year over year. Both U.S. wireless business and consumer fixed line saw noticeable customer attrition, and DirecTV NOW failed to gain traction, as we had expected previously. Company-wide EBITDA margin declined to 33% from 34% a year ago, as the firm cut back on costs of services to offset the pressure on margin. We still think AT&T warrants a narrow moat rating, as the firm’s scale-based cost advantage against its two smaller rivals, Sprint and T-Mobile, remain intact. Although we are lowering our outlook on postpaid wireless customer growth and total revenue in 2017, we are maintaining our fair value estimate at $35 a share, and shares still appear overvalued to us.

Alex Zhao, CFA, is an equity analyst for Morningstar.

Wireless revenue was down 4% year over year on a 2% decline in service revenue and a 17% decline in equipment revenue. While ongoing adoption of installment plans caused part of the drop in service revenue, average revenue plus billing per customer also declined 1% year over year, reflecting the tough pricing environment in the quarter. AT&T lost 191,000 net postpaid wireless customers in the U.S., better than Verizon but much worse than T-Mobile in the quarter, on flat postpaid customer churn.

AT&T’s consumer broadband business was almost flat year over year on stable profitability. Excluding DirecTV NOW, the firm lost 233,000 video customers in the U.S., whereas broadband Internet access business only added about 115,000 subscribers this quarter. This is consistent with our belief that product cannibalization could limit the potential lift on revenue from DirecTV NOW.

AT&T is moving along with the Time Warner acquisition as it has cleared the regulatory hurdle in Europe and only awaits approval from the U.S. Department of Justice.

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Alex Zhao, CFA does not own shares in any of the securities mentioned above. Find out about Morningstar's editorial policies.
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