AT&T Shares Remain Attractive

We continue to believe AT&T T is moving in the right direction. The firm delivered solid wireless results during the second quarter, while Game of Thrones provided a lift at WarnerMedia’s HBO unit, which has struggled to grow amid a carriage dispute with Dish Network. The troubled entertainment segment again outperformed our expectations, balancing pricing and expenses better than we thought possible, contributing to profit growth. Consolidated cash flow was also again strong, enabling another quarter of significant debt reduction. Management increased its 2019 free cash flow projection to $28 billion from $26 billion. This increase was based primarily on the sale of WarnerMedia receivables, rather than any major change in the business, which appears to reflect management’s desire to begin repurchasing shares as soon as possible. We agree that repurchases would add value for shareholders given the current stock price.

Our view of AT&T's competitive position is unchanged, and we don’t expect to materially alter our $37 fair value estimate. While Sprint and T-Mobile’s negotiations with regulators concerning their merger could cause some turbulence in the near term, we believe AT&T has the scale and network resources needed to maintain a strong position in the wireless industry. At current prices, the shares remain one of our favorites among U.S. telecom stocks.

AT&T added 72,000 net postpaid phone customers, its fifth consecutive quarter of growth, while revenue per customer continues to edge modestly higher (up 2.2% year over year). Total wireless service revenue increased 2.4%, in line with the pace seen in recent quarters. The pace of phone upgrades remained low, which has contributed to steadily improving wireless margins in recent quarters. We also believe competition in the wireless industry has been reasonable, contributing to relatively stable pricing.

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