AT&T does not call my name, but I have a trading idea

On Friday, AT&T (T) and Discovery closed the $ 43B “Reverse Morris Trust” deal that turned their media operations into a major, potentially key player in the field, while separating the core telecom and communications companies.

The merger combined AT & T’s Time Warner business (including Warner Bros., HBO, Cinemax, Turner Broadcasting, CNN, CNN +, HBO, HBO Max, etc.) with Discovery (including Discovery, Discovery +, HGTV, Science Channel, Cartoon Network, TCM, TNT, Food Network, TLC, Animal Planet, etc.). AT&T is moving forward as a more fine-tuned, much lighter company with a focus on 5G, wireless communications and fiber optic networking.

The new, combined media company advanced as Warner Bros. Discovery, which traded on the Nasdaq on Monday under the symbol (WBD).

Under the terms of the agreement, AT&T received $ 40.4 billion at the close. in cash and WarnerMedia’s withholding of certain debts. AT&T shareholders received 0.241917 shares in the new WBD for each share of AT&T shares. AT&T shareholders received 1.7B shares in WBD, leaving these shareholders with about 71% control of the new company, and former Discovery shareholders with control of the balance.

Former Discovery President and CEO David Zaslov has taken on the same positions at Warner Bros. Discovery, while AT&T CEO John T. Stankey, who just succeeded Randall Stephenson in 2020, will retain that role.

Where does this leave AT&T?

Readers should remember that just about a month ago, AT&T managed revenue growth in 2023 for low single-digit (%) growth with adjusted EPS for the fiscal year between $ 2.50 to $ 2.60. As for the dividend, the company expects to end up with a payout ratio of 40% versus free cash flow, which is expected to reach $ 20B. This allows the company to invest around $ 48B (if all goes according to plan) in expanding its 5G capacity and coverage, while improving its fiber optic network. More about the dividend? AT&T will trade ex-dividend tomorrow (Wednesday) and distribute a quarterly payment of $ 0.28 per share. This is well below the $ 0.52 payout that stood for five consecutive quarters. Still, the payout totals $ 1.11, which would be good for a 5.65% dividend.

Does the dividend last long? AT&T reports next week. Wall Street is looking for an adjusted EPS of $ 0.59 with a range ranging from $ 0.53 to $ 0.62, with revenue of $ 29.5B. The company needs to develop the newly refocused costs, perhaps more than expected. The company must also correct the balance sheet, which at the end of the year was simply cruel. Not only did the company’s current ratio come to just 0.7, but the company’s net liquidity came to 0.14% of total long-term debt. Include the $ 40.4B received from the agreement (as if it had no other purpose) and that 0.14% will only be 0.4%. Not impressed.

Oh, another thing. AT&T stood at the end of the year with a tangible book value of $ -17.70 per share (not kidding). In addition, the already mentioned balance sheet “boasted” total assets of $ 561,622B. Goodwill? $ 133,223B Other intangible assets? $ 159,493 billion. This means that AT&T had $ 292,716B in “intangible” assets on the book, or 52.1% of total assets. This means that only 47.9% of the company’s total assets were the kind that you could actually define. Fantastic.

Wall Street

I can find five analysts rated at three stars or better by TipRanks who have commented on AT&T this week, and four analysts from the sales side (3 stars +) who have also initiated coverage of WBD. First AT&T … all five have rated AT&T as a “purchase” or equivalent purchase. The average target price set by the five is $ 23.80, with a maximum value of $ 26 (Frank Louthan from Raymond James, 3 stars and a low of $ 22 twice … Michael Rollins from Citigroup, 5 stars and Philip Cusick from JP Morgan, 4 stars). I’m currently seeing a final sale of $ 19.73.

In terms of WBD, five-star Bryan Kraft of Deutsche Bank rates the stock as a “buy” with a target price of $ 48, while Hamilton Faber of Atlantic Equities and Vijay Jayant of Evercore ISI (both rated 3 stars) both rated WBD a “buy”. “or buy similarly with identical $ 40 target prices. Finally, David Heger of Edward Jones placed a “hold” rating on the stock with no target price.

My thoughts?

I think we’ll wait until AT&T reports before we pass judgment. Warner Bros. Discovery reports about a week later. I trade anything. In terms of investment, WBD has worked out of it in a competitive landscape, but at least the initial balance is not terrible from a current perspective, but AT&T? What on earth? I would say that if telecommunications were your thing, then go for Verizon (VZ), but that balance is not a bowl of cherries either, and Verizon’s tangible book value is even rougher (is that a word?). I’m sorry guys. The best stock mentioned there is probably WBD, but none of these call my name. With seven times forward-looking earnings, AT&T is by no means cheap. There are better places to put your money. Just my opinion. Unless you have an edge. It gives me an idea.

Trading concept (minimal batches)

– Buy 100 shares of T at or near the last sale at $ 19.71.

– Write an April 29 (post-earnings) $ 22 call for about $ 3.25.

– Receive one dividend payment of $ 0.28 per. on May 2nd.

Net basis: $ 16.18

I have no position yet, but because I was just thinking about this, I have to let you go first.

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