AT&T: The Deal Is Done, Higher Prices To Come (NYSE:T)

AT&T To Merge Warner Media With Discovery

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The AT&T (NYSE:T)/Time Warner merger by no means actually made a lot sense to me. The telecom large paid an exorbitant $85 billion for the media juggernaut. While AT&T had a good plan to promote HBO subscriptions, the corporate mismanaged the Time Warner merger. As a consequence, AT&T’s inventory has been worse than lifeless cash over the past 5 years, down by roughly 50%. Due to AT&T’s heavy-handed administration strategy and different mishaps, the Time Warner merger changed into a catastrophe.

Therefore, it is excellent news for AT&T shareholders that the corporate is by itself once more and might concentrate on its core enterprise. Moreover, it is even higher information for Warner Bros. Discovery (NASDAQ:WBD) shareholders, because the New Company seems considerably undervalued, has substantial development prospects, and can possible respect significantly. I personal each shares, however I’m now growing my WBD inventory place.

The Two Stocks

In November, I wrote an article about AT&T and its spinoff of the WarnerMedia unit. Finally, we now have two shares, AT&T and the New Company, Warner Bros. Discovery “WBD” six months later.



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AT&T’s chart has been rocky, however we lately noticed a constructive bump after the spinoff. The inventory has jumped by about 12% in simply days. Also, the inventory is significantly greater (roughly 20%) from its November/December double backside. Furthermore, we could have witnessed a long-term low at round $16 (spinoff adjusted). Now that the uncertainty is behind, AT&T’s inventory can start rebuilding and doubtless proceed to maneuver greater from right here.

Warner Bros. Discovery



The New Company, “WBD,” started buying and selling a number of days in the past at round $23-24. We see worth motion earlier than the spinoff as a result of we’re taking a look at Discovery’s inventory lately transitioned into WBD. While Discovery shares weren’t doing too effectively on their very own, the mixed firm can do significantly better, and the inventory possible has appreciable room to understand from right here.

WBD’s Bright Prospects

WBD has a novel content material mixture. The merger unites HBO Max with Discovery Plus, providing viewers among the greatest content material in motion pictures, sequence, information, actuality TV, and extra. The mixed media large could have three streaming companies: HBO Max, Discovery+, and CNN+. Furthermore, the corporate additionally has Warner Bros. studio and quite a few cable channels comparable to TNT, TBS, Food Network, TLC, Discovery, Travel Channel, MotorTrend, Animal Planet, Science Channel, New Line Cinema, Cartoon Network, Adult Swim, HGTV, HBO, and extra.


Content (WarnerMedia )

Additionally, the corporate has compelling streaming numbers. First off, the HBO platform is effectively monetized, because it costs $10 per thirty days with ads or $15 per thirty days with out adverts. Moreover, on the finish of 2021, HBO Max had 74 million streaming subscribers, and Discovery+ had an extra 22 million streaming subscribers. These are spectacular numbers, and WBD ought to proceed rising its streaming enterprise because it attracts extra prospects at house and overseas.


Subscribers (AT&T)

There are greater than 3 billion Internet customers globally, and 74 or 22 million just isn’t a really important share. Also, if we evaluate Netflix’s (NFLX) subscriber statistics, the corporate had round 222 million subscribers on the finish of 2021. This dynamic illustrates an excessive amount of market share to seize for WBD, and the market is not going to get saturated for a very long time.

Analysts’ estimates are for round $50 billion in revenues for WBD this 12 months. Furthermore, WBD’s revenues will possible rise by about 7%-12% YoY in 2023. If the corporate builds on its development momentum, it will possibly proceed delivering strong development in future years. The inventory’s valuation is barely about $63 billion in the present day, as the corporate is buying and selling at solely round ten occasions ahead EPS estimates and roughly 1.2 occasions anticipated gross sales. These are remarkably low valuation ratios for a corporation in WBD’s place, implying that shares are grossly undervalued now.

In comparability, Disney (DIS) trades at a ahead P/E ratio of round 30 and has a ahead gross sales ratio of roughly 2.7. Netflix additionally trades at a P/E ratio of about 30 however has a P/S ratio of about 5. Therefore, we see that WBD’s nearest opponents commerce at ratios 2.5-5 occasions greater. It’s troublesome to elucidate this huge disconnect, nevertheless it seems like WBD’s inventory worth can double, and it’ll nonetheless be considerably cheaper than Netflix or Disney. Therefore, I think we will see far more upside from WBD as we advance.

AT&T Learning From Its Mistake

AT&T could have overpaid for Time Warner within the first place. $85 billion and a battle with the Justice Department to spin WarnerMedia again off for a a lot smaller sum a number of years later just isn’t a very good deal. AT&T’s administration reportedly refused to hear to Warner Media execs. Therefore, the corporate made many errors throughout and after its merger with Time Warner. An smug, know-it-all angle isn’t a successful recipe, particularly when a fancy merger of two very totally different firm cultures. AT&T is an outdated gray swimsuit and tie telecom large that focuses on reducing prices to extend effectivity.

In distinction, Time Warner has a extra inventive and laid-back ambiance. Imposing its firm tradition on Time Warner possible stifled creativity and introduced on detrimental unintended penalties fairly than having a constructive impact. We see AT&T’s detrimental impression on Time Warner’s valuation as the corporate was purchased out for $85 billion and spun off for roughly half that quantity.

To keep away from additional merger disasters, AT&T ought to concentrate on its core companies. Additionally, if it desires a development enhance, the corporate ought to think about investing in companies which have related firm cultures and have companies that resemble AT&T’s. However, one factor you can not take away from AT&T is that the inventory is remarkably low cost right here.

AT&T’s Attractive Valuation

AT&T stays among the finest worth propositions available in the market in the present day. The firm has a ahead P/E of round 7.9 and retains a considerable dividend of roughly 6%. Moreover, as the corporate recovers right here, it ought to improve its dividend once more. Next 12 months, consensus estimates are for $2.61 in EPS. Therefore, the corporate is buying and selling at simply 7.5 ahead earnings estimates now.



Additionally, we may see greater earnings outcomes as AT&T turns into leaner and extra environment friendly following the WarnerMedia spinoff. Higher-end EPS estimates are for about $2.80 subsequent 12 months, and if the corporate’s P/E a number of expands to about ten, we may even see AT&T buying and selling at about $28 a 12 months from now. This worth goal offers us a couple of 44% potential upside in AT&T shares.

Why I Own Both Stocks

I personal WBD for its development, and I personal AT&T for its worth. However, at solely round 10 occasions ahead earnings WBD is a powerful worth play. I’ve held AT&T for the reason that November declines final 12 months. While I acquired some shares in WBD from the spinoff, it isn’t sufficient. I’m including to my WBD place in anticipation of upper development and extra demand for this inventory. I count on WBD’s market cap to roughly double to $100 billion over the following 12-24 months, resulting in an approximate 100% acquire for the inventory. In my view, AT&T must also do effectively, appreciating by roughly 40-50% over the following 12 months.

  • My WBD 1-year worth goal vary is $35-50
  • My AT&T 1-year worth goal vary is $25-30

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