Investors have expressed concerns about the decline in AT&T and Verizon Communications stock this year. The worries stem from issues such as lead-cable contamination, increased wireless competition, and industry growth slowdown. However, Citi analysts believe this presents a great opportunity for bargain hunting.
Potential Turnaround Story
If the costs associated with cleaning up lead-wrapped cables turn out to be lower than anticipated and wireless telecom providers find stability in their competition, AT&T (T) and Verizon (VZ) could offer a promising turnaround story. Consequently, Citi's Michael Rollins has upgraded Verizon to a Buy rating from Neutral. Additionally, he has increased his target price for the stock from $39 to $40. Similarly, AT&T has been given a Buy rating, but with a target price of $17, which remains unchanged. Rollins has maintained a 'High Risk' rating for both companies.
Positive Market Response
Verizon shares saw a 1.3% increase to $33.55 in premarket trading on Tuesday, while AT&T shares experienced a 1.8% rise to $14.21. It is important to note that both companies' stocks have declined so far this year. AT&T has decreased by 23%, and Verizon has witnessed a 15% drop since the previous close.
Resilience Amid Challenges
The significant decline in stock prices followed a report by The Wall Street Journal in July. The report highlighted over 2,000 abandoned lead-encased telecom cables and warned about potential health risks associated with them. Nonetheless, Rollins believes there are indications that the stocks will recover from this setback.
In conclusion, despite the challenges faced by AT&T and Verizon, the current market conditions present an opportune moment to consider investing in these stocks. With potential for a turnaround and Citi's upgraded ratings, both companies are worth a closer look.
Telcos Face Potential Losses Due to Lead-Wrapped Cable Exposure
According to a recent report, telecommunication companies (telcos) are facing significant market cap losses due to their potential exposure to lead-wrapped cable issues. The estimated cost of remediation for these telcos is around $15 billion, while their market cap has already dropped by $21 billion, as stated by Rollins.
Despite a number of Wall Street analysts claiming that the initial reaction to the lead-sheathed cable story was exaggerated, the continued stock decline of AT&T and Verizon suggests that other concerns are impacting investor sentiment. However, Rollins believes that the wireless industry is in a better position than anticipated and showcases resilience.
Rollins further highlighted that the industry's postpaid phone growth is surpassing expectations, both from his previous projections and the analyst consensus. Moreover, the business segment seems to be performing better than feared, with the level of layoffs showing signs of subsiding.
There is potential for AT&T and Verizon to improve their free cash flow through pricing increases and cost-cutting measures. These actions indicate a reduction in intense price competition as the companies strive for profitability.
Despite these positive aspects, Citi maintains T-Mobile US (TMUS) as its top pick in the wireless sector. The reasoning behind this choice is T-Mobile's ability to lead the field in cash returns to shareholders.
In conclusion, while telcos face challenges related to lead-wrapped cable exposure, the overall health of their industry appears more promising than anticipated. AT&T and Verizon have opportunities to enhance their financial performance, but T-Mobile remains a preferred option for investors seeking strong cash returns.
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