On March 23, Cowen & Co. released a note updating their model for AT&T Inc. (NYSE: T) based on information contained in a recent company 8-K filing, resulting in a lower price target, while maintaining AT&T’s Market Perform rating.
In the report, Cowen reiterated its Outperform rating on its Top Picks with the following price targets as of March 20:
- Level 3 Communications, Inc. (NYSE: LVLT) – $62 PT, potential 11.9 percent upside.
- Rackspace Hosting, Inc. (NYSE: RAX) – $75 PT, potential 39.8 percent upside.
- T-Mobile US (NYSE: TMUS) – $48 PT, potential 44.8 percent upside.
Level 3, Rackspace and T-Mobile have market caps of $19 billion, $7.6 billion and $26.8 billion, respectively. AT&T’s $172.5 billion market cap makes it much harder for the company to move the needle.
Related Link: Will Apple And AT&T Break This Dow Transition Pattern?
Tale Of The Tape – 2015
Cowen Rationale – AT&T: Maintains Market Perform, Lowers 2015 PT
- Cowen lowered its AT&T price target to $35 from $37, based upon its discounted cash flow (DCF) model which utilized a 6.5x EBITDA multiple and a 6.9 percent cost of capital.
Additional model assumptions:
- 2014-2019E Revenue CAGR of 1.3%
- EBITDA margin to 35% by 2019
- Cowen noted “wireless margins down Y/Y (1Q14 of 45.4%) due to continued adoption of Mobile Share Value (60% of postpaid smartphone base) and Cricket results.”
- AT&T expects wireline revenues down Y/Y for 1Q 2015, and but forecasts margin improvement in future quarters.
- AT&T expects the ~$48.5 billion merger with DirecTV (NASDAQ: DTV) to close 1H2015; and to result in one time charge of $134 million from a reduction in headcount of 3,000 employees.
- Cowen’s model assumption of $18.1 billion revenues for AT&T wireless remained unchanged; but lowered “service margin to 42.8% from 45.2%.”
- The Cowen model assumes that AT&T will borrow $13 billion at a 4.1 percent interest rate in conjunction with its recent $18.2 billion AWS-3 spectrum auction award.
- Cowen “fine-tuned” its model to include the capitalization of this interest during 2015 and 2016, with this interest being expensed in 2017, (assumes deployment of AWS-3 spectrum beginning Jan. 1, 2017).
- Based on these assumptions, Cowen’s DCF model now reflects a lowered 2015 interest expense to $3.44 billion, down from $3.97 billion.
Depreciation Expense Reduction:
- AT&T extended the useful life of software assets from three to five years.
- AT&T sold $2 billion of Connecticut wireline assets.
- Cowan reduced depreciation expense to $17.8 billion, down from $18.32 billion.
Cowan AT&T PT Risk Factors:
- Competition and consolidation in the wireless industry could result in “disruptive/irrational pricing as smaller carriers seek to gain market share the wireless industry.”
- AT&T’s wireline and business services are “reliant to a certain degree” on the macro-economy and business spending.
- AT&T has grown its dividend and if this were unable to continue it would have a negative impact on the stock price; changes in the interest rate environment could impact the AT&T stock price either positively or negatively.
Cowen viewed 2015 “as a transformative year” for AT&T, citing: financing of the AWS-3 spectrum, three “meaningful acquisitions,” new international markets, new TV products, and mobile video platform, while facing “intense U.S. competition.”
Notably, AT&T reiterated full-year 2015 guidance.
Latest Ratings for T
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