AT&T (T) reported mixed 4Q21 results and issued guidance for 2022 that was below expectations and back-half loaded.  This is a setback to our investment thesis after several quarters of improved operational and financial performance. Some of the issues are one-time in nature which should allow 2H22 to reveal steady growth of the new communications-focused company in line with peers.  A newly announced analyst meeting scheduled for March should fully reset expectations and perhaps be a clearing event that allows the better stock performance leading into the earnings report to re-emerge.

Stock Price Reaction:  After rallying sharply in December and January amid several analyst upgrades and investor rotation toward value stocks, T shares tumbled nearly 10% in response to the earnings, giving up half of the recent gains.

Earnings Analysis:  Subscribers were good again but T had preannounced the gains for wireless and fiber broadband.  There was modest disappointment with worse than expected non-fiber broadband losses fully offsetting the fiber broadband gains.  Revenues generally performed well but margins were under pressure across the board.  There has been fear that T was promoting too aggressively to drive 2021’s strong subscriber gains.  4Q21 results amid a still highly competitive wireless market will keep those fears front and center.  Margins were also under pressure at Warner Media, which is set to merge with Discovery Communications during 2Q21.  In turn, T issued guidance for Warner Media well below analyst expectations, driving shares of Discovery lower and compounding the decline in T shares.  T will own 71% of the new company before distributing it to current shareholders.  We believe the Warner Media reaction was overdone as the guidance is above Discovery’s own forecast and management reiterated that 2022 will still represent peak losses from the streaming transition.  Finally, the debate over the company’s aggressive free cash flow forecast post the Discover merger picked up steam as the company’s updated forecast includes a much greater contribution from the recently spun off DirecTV, implying that core FCF from the core communications business is below expectations.

Target Price:  We have less confidence in our previous target of $36 being reached in 2022.  However, as we noted in last quarter’s update, a lower target of $30 still provides a big total return and the shares would remain inexpensive.  The March analyst meeting will be critical for T shares.  The meeting will provide datapoints that should clarify whether the new T can meet our initial expectations for low to mid-single-digit growth that is necessary to drive the shares to a mid-teens total return.  The March time frame should also offer a final update on the new dividend and the plan for distributing 71% holding in Warner Brothers Discovery.

AT&T is widely held by clients of Northlake Capital Management, LLC, including in Steve Birenberg’s personal accounts.  Steve is sole proprietor of Northlake, a registered investment advisor.  Northlake’s regulatory filings can be found at www.sec.gov.