AT&T (T) reported mixed third-quarter results Thursday that showed decent earnings and cash flow expansion but relatively weak revenue performance. We are maintaining our $24 fair value estimate.
Though AT&T noted its first sequential growth in its wireline business revenues in three years and nice gains in wireless services revenue (up 4%+), total operating revenue still fell 0.3% from the same period a year ago. The firm had a net gain of 2.1 million wireless subscribers in the quarter (319,000 were postpaid)–pushing the total past 100 million–and recorded better churn rates (1.28%% versus 1.32% in the prior-year period). The company also sold 4.8 million smartphones and activated 2.7 million iPhones during the quarter, despite losing exclusivity on the iPhone earlier this year.
As for earnings, AT&T recorded decent growth in the period ($0.61 versus $0.54 in last year’s quarter) thanks primarily to improvement in the company’s operating margin (and wireless margins specifically), which advanced 2.6 percentage points from the prior-year period, to 19.8%. Cost of sales, SG&A, and D&A each fell faster than revenue. Free cash flow was fantastic, reaching $5.1 billion in the quarter. Looking ahead, we expect the iPhone 4S to be a significant earnings catalyst in the current quarter and would not be surprised to see an earnings beat by AT&T in its fourth quarter.
All things considered (including its bid for T-Mobile), we’re big fans of AT&T’s cash flow generation and view its annual dividend yield of nearly 6% as particularly attractive. We’d look to pick up shares under $17 (the low end of our fair value range).