AT&T's Stock May Drop to New Lows

(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)

AT&T Inc. (T) stock has fallen 21%, and now options traders are betting the stock drops 7% to a new low by the start of early next year. Even worse, is that technical analysis agrees with the options market analysis, suggesting the stock may decline by as much as 10%, from its current price of $30.69. 

The company delivered earnings that came in below analysts estimates at the end of October, despite reporting in-line revenue. Following the weak results, analysts have slashed their earnings and revenue estimates for 2019 and 2020. 

T Chart

T data by YCharts

Betting on a Decline

The put options for expiration on January 18 heavily outweigh the bullish calls bets by a ratio of 7 to 1, with 70,000 open contracts. A buyer of those puts would need the stock to fall 5% to $29.15. Even worse, the puts at the $29 suggest the stock drops 7% to $28.45, a new 52-week low. 

Weak Chart

The chart shows that the stock has been in a steep downtrend since August of 2016. The shares recently plunged below technical support at $31.75, now that level will act as technical resistance. Should the price fail to rise back above resistance, then the shares are likely to fall to the next region of support at $27.50. 

Slowing Growth

The bearish outlook for the stock is a result of a deteriorating growth outlook for the company. Analysts estimates have that revenue in 2019 will grow 6% down from previous forecasts in October of 7%. Meanwhile, growth in 2020 is expected to be less than 1%. 

Earnings estimates in 2019 have been reduced by 2% to $3.56 per share since the beginning of October. Meanwhile, earnings estimates for 2020 have dropped by 1% to $3.61 per share. 

T EPS Estimates for Next Fiscal Year Chart

T EPS Estimates for Next Fiscal Year data by YCharts

The average price target on the stock has fallen sharply since the beginning of the year. But analysts still see the stock rising by 16% to $35.50, which may be too optimistic. 

The good news is that the stock trades at a PE ratio of 8.7, which is well below that of the S&P 500. But with analysts' estimates falling, the low PE ratio may be justified. That may be especially true should revenue, and earnings growth, continue to slow. 

Michael Kramer is the Founder of Mott Capital Management LLC, a registered investment adviser, and the manager of the company's actively managed, long-only Thematic Growth Portfolio. Kramer typically buys and holds stocks for a duration of three to five years. Click here for Kramer's bio and his portfolio's holdingsInformation presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future performance.

 

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