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!

Friday Fixed Income – Betting Against AT & T (T)

Never miss another opportunity to devour prey!

6 thoughts on “Friday Fixed Income – Betting Against AT & T (T)

  • April 1, 2019 at 3:23 pm

    I like this play as well, though I’d probably enter the trade at VIX<12. This is a good put to trade in and out of volatility. You know it's a bargain when vol is low and you know it's time to exit when vol is high.

    The bull case for why T is not the next GE is that the smartphone data market is stable. I.e. no one will downgrade to a dumb phone during the next recession. People/addicts will go without food and cars before they give up the iphone, and if T can earn a low single digit ROE as a utility, they can cover their debt. The assumption behind that is that competitors can't cut margins any further and interest rates won't rise.

    • April 1, 2019 at 6:53 pm

      I’m betting while phone and data demand are stable (and probably growing) the supply of those items is just too large. The whole industry is in a race to be the low cost/volume supplier. Tough on margins when you need a lot of capex to build out your 5G capabilities! At any rate, I bet less than $1,000 here. It won’t break me to turn out wrong. Just pay out nicely if T really screws the pooch.

  • April 1, 2019 at 3:55 pm

    I’ve always been a bit confused about how AT&T makes money, but I’m suspicious that the company won’t generate as much cash in the future as it does now. I must not be the only one because the stock’s yield and P/E shows that investors expect zero to negative growth.

    Half the revenue (pre-Warner merger) came from cell phone service. I’d argue that that revenue is relatively stable. The problem is that 1/3 of their income comes from the “entertainment group,” which I imagine means pay television and home Internet service. That business is likely doomed long term, though there’s some hope that the Warner merger will allow them to salvage that business into a smaller streaming focused future. The last 1/6 of their income comes from business phone/Internet service. That’s probably fairly stable.

    Truth be told, I was thinking about going long on AT&T. As others have mentioned, their largest segment is recession proof. A recession would accelerate cord cutting and pay-TV subscriber losses, but the Internet service would stay. Businesses would continue to pay for phone and Internet during a recession. I see the argument that a debt downgrade on AT&T would impact them, but management has already talked about how they’re planning to pay down debt (I know they’ve lied about this before).

    The only thing that keeps me from investing in T is VZ being a better choice. VZ is more focused on mobile, which I think is a better bet for the future.

    • April 1, 2019 at 6:49 pm

      Best of luck with VZ. I think they are much less leveraged and therefore a safer bet.

  • April 24, 2019 at 11:47 pm

    I sold all my T holding early this week because of this post. It’s always nice to get a nice lucky guess right before an earnings call. Thanks for making me think twice about holding T. They are making the right moves on paying down some of the debt, but you’re right, they’re not in the right sectors for long-term growth. Not a company that’s going to be in my portfolio.


Leave a Reply

Your email address will not be published. Required fields are marked *


This site uses Akismet to reduce spam. Learn how your comment data is processed.