AT & T (T) has too much debt!
music selection: “Just My Imagination” — The Rolling Stones
On Fridays at the raptor, I like to discuss opportunities my bond research uncovers. Today, that is the opportunity in long dated puts for AT & T (T). Regular readers will remember a similar opportunity in DISCA.
AT & T is not the company it was decades ago. The original landline business is a trivial part of the modern company. Today, the two main segments are wireless telephone and entertainment (Direct TV). Both are declining businesses that are built on a mountain of debt.
The wireless business is in a mature industry. There are few people left who do not have smartphones so revenue is obtained by stealing customers from competitors. This has led to a brutal pricing atmosphere. AT & T is actually growing its subscriber count. But not fast enough to overcome the erosion of margin. This is a business in decline and there is no way to a see a future where the picture changes. At the same time, the business is capital intensive because of the need to build out 5G infrastructure.
The entertainment business is suffering from the cord cutting phenomenon. They have added to their holdings there with debt fueled acquisitions and have even added an OTT service but they are too late to the game. Amazon, Netflix, and Hulu already have most of the OTT market share and there is no chance Direct TV can become a dominant player at this stage.
S&P has AT & T on credit watch. They will be downgraded if they 1) have another large debt financed acquisition 2) margins continue to erode (almost certain) 3) management authorizes another share buyback. I think it is a sure bet the company will face a credit downgrade and shares will tumble as institutional holders find themselves legally obligated to sell.
I am playing this opportunity by buying T210115P00028000. I purchased three such puts yesterday for 3.07 a share. There may be opportunities to exit at a profit before expiry as premiums expand in relation to broad market volatility events. These are likely as long as the yield curve remains inverted.
Devour your prey raptors!