AT&T Inc. and Verizon Communications Inc., both of which have experienced sluggish performance this year, are anticipated to encounter brighter prospects, according to Citi Research analyst Michael Rollins.
Rollins elevated the stock ratings of both companies from neutral to buy on Monday, citing potential alleviation of various pressures. In premarket trading on Tuesday, shares of AT&T (T, +2.57%) and Verizon (VZ, +2.16%) surged by nearly 2%.
The analyst highlighted the potential benefits arising from an improved landscape within the wireless market. He observed that recent price increases implemented by AT&T and Verizon could contribute to their stock performance. Moreover, the trend of consumers retaining their mobile devices for extended periods has led to stability in customer turnover and a reduction in expenses associated with device upgrades, which the carriers typically incur.
Rollins noted that, despite the cable industry's advances in the wireless sector, the gains made by cable providers have not resulted in a complete displacement of other players in the market.
Year-to-date, AT&T shares have witnessed a decline of 23%, while Verizon shares have slipped by 15%. In comparison, the S&P 500 index (SPX) has recorded a 15% increase over the same period. Concerns stemming from reports about lead cables have impacted the performance of both AT&T and Verizon shares.
Rollins acknowledged that initial apprehensions related to the lead cabling concerns have been tempered by carrier disclosures on potential exposure. However, uncertainty persists regarding the extent of potential financial risks, and a conclusive resolution may take several years. Despite this, both Verizon and AT&T seem to have experienced market value losses exceeding Rollins' estimates for remediation costs.
Rollins' analysis suggests that if the implications of lead cabling issues lean toward being immaterial or focused on non-buried lead cabling remediation, the stocks, particularly those of AT&T and Verizon, could potentially recoup a significant portion of their recent market capitalization losses, which collectively amount to $21 billion.
Highlighting the valuation metrics, Rollins pointed out that AT&T and Verizon shares are currently trading at their lowest levels in over a decade in terms of firm value to earnings before interest, taxes, depreciation, and amortization. Simultaneously, their dividend yields have reached decade-plus highs.
In conclusion, Rollins sees the next 12 months as an opportunity for some of the prevailing market concerns to subside, leading to a more balanced valuation outcome. He also anticipates enhanced free cash flow, which could result in reduced net debt leverage and provide support for dividend disbursements.
For AT&T shares, Rollins maintained a target price of $17, while he raised the target for Verizon shares by $1, reaching $40.
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