Time to take profits on AT&T stocks (NYSE:T)

Imaginima

Investment thesis

AT&T Inc. (NYSE:T) is a stable company in the telecommunications industry, which ranks first among competitors in terms of revenue. Nonetheless, we don’t see a meaningful outlook for AT&T at this time as the stock’s market valuation is fair, and soon the communications sector, along with many others, will come under inflationary pressure.

Tariffs and consumer demand

Telecommunications has always been a protective sector. Telecom companies have high pricing capacity and are stable in terms of consumer demand, as mobile communication and Internet access in developed countries have now become basic services. In the US consumer basket, spending on communication, along with education, accounts for about 6% of average total household spending.

average total household expenses

Source: United States Bureau of Labor Statistics

The industry is highly competitive, primarily due to the quality and volume of services available by subscription. Although there is a distinction between the tariff plans, there is no significant difference for the consumer because in the average monthly income (around $5,700), all unlimited tariffs are around 2%.

The most important thing for the consumer remains the quality of the services provided, and it is impossible to distinguish the best operator because all have their advantages and disadvantages. For example, T-Mobile (TMUS) is not the company with the largest mobile network coverage, behind Verizon (VZ) and AT&T, although it outperforms its competitors (source: NYT) in the 5G segment and in terms of download speed.

Telecom competitors

Source: New York Times, wire cutter

Nevertheless, due to infrastructure development and increased availability of communication services in the industry, there is a steady downward trend in ARPU.

downward trend in ARPU

Source: Statista

Despite the fall in ARPU, companies’ operating margins remain fairly stable, with part of the cost of services also becoming cheaper with the development of infrastructure.

Operating margin

Source: company data, AT&T report

Spending by telecommunications companies

Expenditure by companies in the communications sector consists mainly of the installation and maintenance of equipment, the renewal of software and licenses. This also includes standard expenses for labor, rent, utilities, etc.

Expenses, % of operating costs

Source: 3G4G

The emerging open RAN technology is a subset of virtual radio access networks with open interfaces. The main driver of the transition to open networks is the shift to 5G network architecture and services. They provide the ability to mix and match components from different vendors, which will allow communications companies to significantly save on network maintenance.

Therefore, the trend of reducing ARPU will continue to be counterbalanced by the lower costs of telecommunications companies, allowing them to maintain the margin of the main players in the competitive environment.

In the short term, however, the telecommunications sector could be affected by general inflationary pressure. The greatly increased cost of components and labor cannot be quickly offset by higher tariff costs. As noted above, the telecommunications market is competitive, so players need to make a smooth transition to more expensive tariffs, adhering to competitor dynamics so as not to suddenly lose market share.

Wall Street analysts have already priced in the factor of the industry’s expected margin decline, so the consensus EPS growth forecast for 2022 has slipped into negative territory.

Communications Services Earnings Growth Forecast

Source: Yardeni

Communication Services Profit Margin Forecasts

Source: Yardeni

Conclusion

Our coverage of the telecommunications sector includes only AT&T, for which the investment idea was opened with a target price of $22.6.

AT&T Rating

Source: Invest Heroes calculations

Over 7 months, including the payment of the dividend and the sale of Discovery shares (WBD), the total return amounts to 23.11%.

According to our calculations, at current prices, the increase is only 8%. Considering all the risks, we believe the company is not attractive to long-term investors at present, as the investment will not yield much profit. Therefore, we are changing our rating from BUY to HOLD and believe this is a good time to take profits.

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