AT&T’s ‘clearer’ story could give new life to beaten-down stock, analyst says in upgrade

AT&T shares are up 3.6% in Thursday morning trading.

Flannery is upbeat about the impending closure of Discovery Inc.’s DISCA, +2.72% merger with AT&T’s WarnerMedia, which could take place by the middle of next year. Once that deal is complete, AT&T will be left with “a much clearer and focused communications business,” he wrote.

Investors may come to better appreciate AT&T’s communications business after the WarnerMedia deal closes, according to Flannery. “We believe AT&T’s core communications business is undervalued and should re-rate as we get more clarity on the WarnerMedia/Discovery transaction,” he wrote, meaning that the market could assign a higher multiple to this part of the business.

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Flannery expects that AT&T may provide a 2022 outlook for its core communications business when it reports fourth-quarter results in January, and that forecast could offer investors more clarity on the state of this key part of the company. Additionally, executives could soon shed more light about how they will approach dividend policy after the WarnerMedia spinoff.

Flannery cheered AT&T’s “solid” financials and recent operating performance, highlighting the company’s “industry-leading postpaid phone adds.” While a slowdown in overall wireless industry growth and emerging competitive threats “create clear downside risks” for the market, Flannery says those worries are already largely reflected in AT&T’s share price.

He cut his price target to $28 from $32 in conjunction with his upgrade, but he still thinks AT&T’s shares are undervalued: “At these levels we believe the stock is discounting an overly negative outlook; indeed less than one third of the covering analysts have a positive rating on the stock.”