AT&T stumbles as J.P. Morgan downgrades, citing worries over wireless, broadband
Brandon Bell
AT&T (NYSE:T) shares fell around 4.5% early trading on Friday as investment firm J.P. Morgan downgraded the telecom giant, citing worries over its wireless and broadband segments.
"Based on recent commentary from management lowering estimates for wireless (in May and again in June) and broadband (in June), we believe AT&T is facing marginally more pressure in Mobility (from Verizon, T-Mobile, and cable) and Consumer Wireline (from cable, FWA) as well as ongoing pressures in Business Wireline," analyst Philip Cusick wrote in his downgrade note.
Cusick lowered his rating on AT&T (T) shares to neutral from overweight and cut his per-share price target to $17 from $22.
Cusick believes that mobility growth will slow to just 2.5% in 2023, down from 4.7% in 2021 and 3.5% in 2022, as AT&T's (T) postpaid gross share add has fallen from 32% in 2022 to an estimated 30% this year, as Verizon (VZ) and T-Mobile (TMUS) continue to be promotional and competitive.
In late June, AT&T (T) CFO Pascal Desroches said the Dallas-based telecom giant saw new phone customers in the range of about 300,000, well below the 476,000 that Wall Street analysts were forecasting.
For fiber, Cusick is now expecting cable companies to take back share as AT&T (T) has faced rising deployment costs and the company looks ready to cut spending to pay down debt.
"As locations passed expansion slows, we could see downward revisions to IP-broadband subscriber additions," Cusick wrote. "While fiber adds have slowed, we still expect copper losses to continue apace, meaning that total broadband sub base is likely to continue to fall from here."
In addition to the downgrade, Cusick noted that even though AT&T (T) shares are trading at a "record low" - valued at just 5.6 times EBITDA and yielding 7.3% - there have been repeated concerns about its wireless and fiber growth businesses, as well as rising interest rates and uncertainty regarding lead sheathed cables, all of which will limit any "substantial" rebound.
Regarding the copper piper sheathing issue, Cusick said there is no way right now to calculate any potential liability, but it's clear that AT&T (T) has the largest exposure, given that its local exchange carrier business covers roughly 40% of the homes in the U.S. and the presence of its long haul network.
"We see the potential liability as an unquantifiable, long-term overhang for the stock, which adds to the risk premium and drives much of our PT reduction," Cusick added. 
Cusick said that AT&T (T) is still generating "solid" free cash flow, but it has a limited amount to pay down debt or buy back stock and the cash it generates from DirecTV will continue to decrease. With roughly $8B of the company's $16B in free cash flow going to dividends, along with a $2.4B payment for C-Band due the end of this year, and higher taxes, the company is left with a limited amount left over to repair its balance sheet.
Cusick also noted that other companies such as Lumen Technologies (LUMN) and Frontier Communications (FYBR) likely also have "exposure" to potential copper lead sheathing liability. Lumen and Frontier shares were down 8% and 12.5%, respectively in mid-day trading on Friday.
Analysts are largely bullish on AT&T (T). It has a BUY rating from Seeking Alpha authors, while Wall Street analysts rate it a BUY. Conversely, Seeking Alpha's quant system, which consistently beats the market, rates T a HOLD.
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