NewStreet upgrades AT&T to Buy after guidance update

Investing.com -- NewStreet Research has lifted its AT&T (NYSE:T) stock rating to Buy, citing newly updated stronger-than-expected guidance, robust share repurchase plans, and a promising strategy for fiber expansion.

The firm has also set a new price target of $32.50 for the end of 2026, implying a roughly 37% upside from current levels.

AT&T updated its outlook on Tuesday, with the new targets indicating an acceleration in key financial metrics.

Most notably, free cash flow (FCF) is projected to grow from $16 billion to over $18 billion, exceeding prior expectations. Similarly, EBITDA growth has been revised upwards to 3% or more, compared to a previously anticipated 2%+. The company has also increased the lower bound of its 2024 EPS guidance from $2.15 to $2.20.

NewStreet projects $34 billion in AT&T’s excess cash over the next three years. Of this, $20 billion is earmarked for share repurchases, with an additional $10 billion allocated for acquisitions.

“This is roughly in-line with what we expected, though we are surprised it isn’t better given higher EBITDA and FCF guidance,” NewStreet analysts said. “They are either being conservative, or there are other uses of cash that we didn’t anticipate.”

Fiber expansion remains a cornerstone of AT&T’s strategy, with plans to reach 45 million locations by 2029, up from an earlier target of 41 million. While this falls short of the 50 million locations NewStreet had anticipated, the firm acknowledges the company’s faster-than-expected rollout pace.

The report also notes a benign competitive environment in wireless, with expected annual subscriber growth of around 1% and steady margin expansion. These conditions could support valuation multiple expansion, particularly if AT&T continues shifting its asset mix toward higher-multiple broadband.

NewStreet forecasts AT&T achieving $2.71 in FCF per share by 2027, significantly above the consensus estimate of $2.31. At a 10x multiple, this suggests annual returns of 15%, which rise to 25% at a 12x multiple.

“This would justify an outright buy,” analysts stress.

“If the mobile market is as benign as the guidance implies, multiples should expand. If the Company gets credit for the shifting asset mix towards higher-multiple broadband, it should expand further.”