UBS Likes AT&T's Risk-Reward Profile After EBITDA, Time Warner Deal Pressure Share Price

Despite trading near all-time low valuations, the case AT&T Inc. (NYSE: T)'s stock can now be made, according to UBS.

The Analyst

Analyst John Hodulik upgraded AT&T from Neutral to Buy with a price target lifted from $33 to $38.

The Thesis

Shares of AT&T are trading near their all-time lows based on multiple metrics, including a P/E multiple at a nearly 50-percent discount to the S&P 500 index and a 9.4 times free cash flow multiple, Hodulik said in the upgrade note. (See his track record here.) 

The depressed valuation is based on a combination of concerns, most notably declining EBITDA and the Time Warner acquisition, the analyst said. 

A rationale exists for the belief that AT&T is poised for EBITDA growth in the back half of 2018 after a 6-percent decline in the first half of the year, Hodulik said. The wireless business still accounts for more than 50 percent of total EBITDA and is showing improving average revenue per user trends, a metric that was flat in the second quarter versus a 2-3-percent annual decline in the past two years, he said.

The buildout of FirstNet should see a ramp in the next few quarters and offer a boost to wireless growth and margins, Hodulik said.

The entertainment business does remain a "show-me story," but the worst has likely passed as AT&T brings new features and price increases online, the analyst said.

The acquisition of Time Warner does offer upside from advertising opportunities, and WarnerMedia now faces easier comps after a tough first half of 2018, Hodulik said. 

As AT&T's stock commands such a low valuation, the prospect of EBITDA growth ahead suggests a compelling risk-reward profile, according to UBS. 

Price Action

AT&T shares were up 1.7 percent at $34.01 at the time of publication Friday. 

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