AT&T's (T) stock closed on Friday afternoon at $14.52. That's down 27% over two months. That's down 43% over four years. That's down 56% over seven years. Finally, that's down about 68% over 25 years. There have been good days, good weeks, and even good months. However, the downward trend that just never quits... well I said it, it just never quits.
New News
On Friday, the Wall Street Journal ran a couple of pieces discussing concerns that lead sheathed copper cables related to telephone landlines going back over decades had potentially exposed employees who worked with this lead over the years to risk. A percentage of these workers have contracted illnesses that have been inexplicable but can possibly be linked to exposure to lead.
The article claims that for decades AT&T (T) , Verizon (VZ) and other firms that can trace lineage back to the old Bell System had known that there was lead in their networks and that this could possibly put employees at risk for negative health-related conditions. The article claims that the firm's involved knew that employees that had worked with this lead regularly had elevated levels of lead in their blood from studies done in the 1970's and 1980's. Risks supposedly include kidney problems, heart disease, and reproductive issues.
Lead had also apparently leached into soil around these cables. An investigation by the Wall Street Journal had revealed that telecom companies had left behind more than 2,000 potentially dangerous lead covered cables under water, in soil and overhead. Reporters from the Journal had collected more than 200 sediment samples at nearly 130 of those sites. A rough 80% shows elevated levels of lead.
Run Away !!!
On Friday, JP Morgan's (JPM) four star rated (by TipRanks) analyst Philip Cusick downgraded AT&T from "overweight" (buy-equivalent) to "neutral" (hold-equivalent), while reducing his target price from $17 to $12. Cusick largely cited concerns over the wireless and broadband segments. His comments read as follows: "Based on recent commentary from management lowering estimates for wireless and broadband, we believe AT&T is facing marginally more pressure in Mobility and Consumer Wireline as well as ongoing pressure from Business Wireline."
Cusick sees mobility growth slowing to 2.5% this year from 4.7% two years ago and 3.5% last year. Postpaid gross share also is also expected to fall, even as both Verizon and T-Mobile (TMUS) remain competitive through promotion. Cusick goes on to say that he sees no way to calculate my potential for liability in concerns to the lead sheathing issue, but he does think it's clear that among all players, AT&T has the largest exposure to this problem given that as local exchange carrier business covers about 40% of the homes in the United States.
This morning, Citigroup's (C) five star rated (by TipRanks) Michael Rollins also downgraded AT&T from "Buy" to "neutral" (hold-equivalent), while taking his target price down to $16 from $22. Rollins simultaneously downgraded and cut Frontier Communications (FYBR) and Telephone and Data Systems (TDS) . Rollins did point out that concerns over these lead sheathed cables will likely hang over the stock "for at least a few months and potentially longer" and that this overhang will have an impact until markets can get a handle on the financial risk possibly associated.
My Thoughts
I don't really know what to make of this report in the Journal. I guess we really can't know right now, and it may be a while before we do. We do know that the stock trades at less than six times forward looking earnings and with a dividend of $1.11 per share per year, still yields 7.66% despite already having been almost halved. Too good to be true? Perhaps.
AT&T is expected to report on July 26th. Expectations are for an adjusted EPS of $0.61 on revenue of $30B. Results such as this would compare to $0.65 for the year ago comp and amount to 1% revenue growth. Cash flows are healthy, but largely spoken for. For the twelve trailing months at the time of those earnings, AT&T had generated $32.969B in operating cash flow. Out of this, the firm spent $19.393B in CapEx, for a free cash flow of $13.576B. Out of that the firm paid $8.124B in dividends while repurchasing $881M in common stock. The firm also paid down $52.557B in total debt.
Readers will see that despite robust looking free cash flow, AT&T laid out 459% of that free cash flow total for the things that are supposed to come out of "free" cash. Tragic is the word that comes to mind. Also, it does not leave a ton of flexibility should the firm end up in a bad spot related to the WSJ story.
At last check, the firm ran with a cash balance of $2.86B, down from $38.626B a year earlier as current assets printed at $29.903B, down from $76.856B a year earlier and $170.768B five quarters earlier. Current assets had been paid down to $58.173B from $82.494BB a year earlier. That's a current ratio of 0.51, which is downright awful.
Total assets amount to $400.873B. Before we get excited about that number, goodwill and other intangibles total $197.743B on that, or 49.3% of total assets. Not encouraging. Total liabilities less equity $292.527B, of which $123.441B is still in long-term debt. That's in addition to current debt of $18.2B. Simply put, even with paying down as much debt as AT&T did last year, this balance sheet is something out of a monster movie.
Trade Idea
The best idea might just be to say "no."
Relative strength has entered into technically "oversold" territory. That does not entice me. The daily MACD (moving average convergence divergence) is ugly. The stock suffered a "death cross' in early June. The selloff since the breakdown in late April has come on increased trading volume.
I find the likelihood that the stock tests the lower support line of this regression model to be high. That means something close to $12.50. One could short the stock, as I see less than 2% of the float held in short positions as recently as late June. My gut? This stock will be eligible for the "Stocks Under $10" portfolio that I run here at Real Money.
(Verizon is a holding in the Action Alerts PLUS member club. Want to be alerted before AAP buys or sells VZ? Learn more now.)
