Year to date, shares of AT&T (T) - Get Report are up 14.5%. The shares peaked in July and began to slide down after the second-quarter report. Over the weekend, AT&T agreed to acquire Time Warner (TWX) in a deal worth more than $85 billion. AT&T agreed to pay $107.50 a share, half in stock and half in cash. The companies said they expect the deal to close by the end of 2017.
Is it time to hang up on AT&T stock?
AT&T plans to finance the deal for Time Warner through a $40 billion bridge loan, with $25 billion coming from JPMorgan Chase (JPM) - Get Report and $15 billion from Bank of America's (BAC) - Get Report Merrill Lynch. (Expect a lot of strong buy reports from these outfits!) The unsecured loan has an 18-month commitment. After that, AT&T will have to fill out another loan application.
The deal is expected to be accretive in the first year after the deal closes. AT&T expects $1 billion in annualized cost savings within three years of the deal closing.
Net debt to adjusted earnings before interest, taxes, depreciation and amortization should be about 2.5x. The deal is subject to approval by the U.S. Justice Department. Both companies are reviewing which, if any, FCC licenses will need to be transferred to AT&T.
On Saturday, AT&T also released its third-quarter earnings results ahead of time. Management will hold a conference call with analysts early Monday morning to discuss the results.
The company reported third-quarter fiscal 2016 earnings of 74 cents per share, in line with the consensus estimate. Revenue rose 4.6% to $40.89 billion, below the estimate of $41.15 billion.
AT&T had 79.4 million business wireless subscribers and added 191,000 post-paid subscribers and 1.3 million connected devices. Wireless churn was 0.97%, vs. 1.05% in the year-ago quarter. The wireless operating margin of 29.6% was strong.
AT&T is still trying to digest the DirecTV merger and squeeze out $1.5 billion in cost savings. Those savings are to come from layoffs, joint marketing, single truck rolls, debt refinancing and new content contract renegotiations. Revenue for 2016 is expected to increase 11.5% to $165.07 billion and just 1.3% in 2017 after the DirecTV deal is fully completed. Revenue rose 11% in 2014, for comparison.
Earnings, on the other hand, should continue to grow by the mid-single digits. In 2015, earnings grew 6.3% and are expected to grow another 6% in 2016. Earnings will probably expand 5% to 6% in 2017, because of continued margin expansion, a slightly lower tax rate and share buybacks. The company is dismantling its 2G network and expects to see some hefty cost savings as a result, which would help earnings as well. As the company eliminates more expenses, EBITDA margins have been growing from 32% in 2015 to an estimated 34% in 2017.
Right now, the consensus is looking for fiscal 2017 earnings of $3.02. At the current quote, AT&T is trading around 12 times estimates. That's not bad for AT&T. Historically, the shares rarely trade above 14 times. With a 5% dividend yield, the stock pays you to wait to see if the management team can actually the company.
In the mid-$30s, I wouldn't hang up on AT&T.
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.