Telecommunications giant AT&T rose 0.7 percent in the premarket Friday after an analyst at Raymond James upgraded the stock, noting it trades at a more attractive valuation than rival Verizon.
Analyst Frank Louthan raised his rating on AT&T to outperform from market perform. He also issued a price target of $34 per share, which represents a 12.3 percent upside over the next 12 months.
"The outlook for positive earnings growth combined with a strong de-levering story are likely to drive the shares to outperform," Louthan wrote in a note to clients. "AT&T trades at a discount to Verizon of ~3.5x turns of EPS and FCF, with 250 bp higher dividend yield. We believe that the combination of positive earnings growth and delivering over the course of the year will being investors back to AT&T."
AT&T shares slumped in the last 12 months, falling more than 18 percent in that time period. Verizon, meanwhile, is up about 20 percent.
AT&T was under pressure as it faced legal hurdles to close an $85.4 billion merger with Time Warner.
The company also dealt with slowing customer growth. In the fourth quarter, the company added a net 134,000 phone subscribers who pay a monthly bill, well below estimates. AT&T's churn rate also rose to 1 percent last quarter from 0.89 percent in the year-earlier period.
AT&T's streaming service, DirecTV Now, lost 267,000 subscribers in the fourth quarter, more than was expected. The company said the attrition rate was mostly due to people leaving the service after their discounted offers ran out.
Moving forward, profits from DirecTV Now should increase, Louthan said:
First, profitability of DIRECTVNOW should increase as costs are eliminated. Second, the product is now less attractive to a wider audience with limited content. While current users are able to keep the 105 channel package, it could be harder to attract new customers. We expect AT&T to offset this with a more complete lineup of channels from its delayed DTV OTT offering and its enhanced streaming service (likely bolted onto HBO GO), both expected later in 2019.
He also said AT&T could outperform the broader telecom sector this year, with his earnings per share estimate for 2019 implying a return of 18 percent from current levels.
"Where we could be wrong is if investors focus more on the subscriber metrics as they report over the course of the year (regardless of the EPS and FCF impact) and trade off that," Louthan said.
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