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The Ratings Game: AT&T gets a lukewarm upgrade—but being ‘cheap’ might not be enough

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The Ratings Game: AT&T gets a lukewarm upgrade—but being ‘cheap’ might not be enough

A vocal former bear on AT&T Inc.’s stock now feels slightly less pessimistic about the name following an extended slide in the telecommunications company’s shares.

MoffettNathanson analyst Craig Moffett upgraded AT&T’s stock T, +1.18% on Thursday to neutral from sell, writing that “AT&T’s valuation, at last, more appropriately reflects its prospects.” Shares are down roughly 17% from their 2021 closing high of $32.63.

The stock is up 1.2% in Thursday trading.

AT&T’s relative price-to-earnings ratio is “as cheap as it has ever been,” Moffett wrote, one reason why some bulls see the name as “an interesting contrarian long.” Even though the company will be cutting its dividend in conjunction with its plans to spin off its WarnerMedia business, bulls note the company should still have a relatively attractive dividend yield after that transaction takes place.

Moffett, however, is not ready to jump into the bull camp just yet. “We’re partial to contrarian longs, but this doesn’t feel like one to us,” he wrote. “We do conclude, however, that the bloodletting has been enough to move to a neutral posture.”

He continues to have concerns about AT&T’s debt burden, especially with a new mid-band spectrum auction kicking off. Moffett sees AT&T behind T-Mobile US Inc. TMUS, -0.12% and Verizon Communications Inc. VZ, +0.40% in terms of its spectrum positioning, which is notable since the company is reorienting its story back around the wireless business. The company is expected to spend up once again at this new auction as it looks to beef up its spectrum holdings.

When it comes to the auction, Moffett sees “no good outcomes here” since AT&T will either be adding to its debt by paying heavily for additional spectrum or cooling its spending, only to further its “spectrum disadvantage.”

“The telecom business has historically been a sub-GDP growth industry—something that we don’t expect to change in the era of 5G—and AT&T is likely to be a share loser in that sub-GDP growth industry,” he wrote.

Moffett added that given the backdrop, “the market has understandably greeted AT&T’s transformation back to its telecom roots with some skepticism.”

AT&T shares have declined 5.8% year to date, while the SPDR Communication Services Select Sector exchange-traded fund XLC, +1.25% has rallied 22% and the S&P 500 index SPX, +1.43% has advanced 18%.

Source: This post first appeared on http://marketwatch.com/


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