Telecom & Wireless

Why 3 Analysts See AT&T Rising to $40 or Higher

AT&T logo
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If you were just following the tape after the AT&T Inc. (NYSE: T) analyst day, you might think that most of the investment community was losing faith after rekindled bullish hopes on the heels of the DirecTV acquisition. 24/7 Wall St. has seen much data that thinks the initial move might have been a gut reaction after a recovery that was simply the wrong way.

To prove a point, AT&T has been given very high marks by several key analysts after its analyst day presentation. Merrill Lynch, Credit Suisse, and Wells Fargo all see AT&T rising to $40.00 or higher.

Merrill Lynch noted in its report that AT&T is fundamentally sound, with a stable subscription-based business model. Historically, the stock has outperformed during periods of M&A and wireless margin expansion has fueled earnings per share (EPS) growth and during periods of market uncertainty when AT&T’s dividend yield, solid balance sheet and predictable business model are highly valued. The firm expects AT&T will generate improved financial performance post acquisition of DirecTV with upside to consensus EPS, greater dividend coverage and upside to synergy targets.

The firm detailed its thoughts on the guidance given by the company:

AT&T updated 2015 guidance and provided an outlook for 2016-2018. Big picture, the ’15 initial post-deal guide is $0.09 below our pro forma estimate which we attribute to a range of conservative out of the gate assumptions while the 3 year forward picture is better than we forecast. Payout ratio guidance ‘in the 70% range’ implies better than projected free cash flow generation as management reiterated its view with regard to long term capital intensity in the 15% ‘or lower’ range. AT&T management took several opportunities to highlight risks and uncertainties that are baked into forecasts while highlighting synergy upside potential that is not, such as cross-selling revenue opportunities.

As a result Merrill Lynch analysts, David Barden, Michael Funk, and Stephen Douglas, reiterated a Buy rating with a $40 price objective, implying an upside of 17.5% from current prices.

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