AT&T stock falls after discovery of toxic lead cables

the Department of Justice is an Environmental Protection Agency are investigating Telecom Giants Verizon at at T for the potential health and environmental risks from a network of toxic lead sheath cables running across the U.S now this comes after a Wall Street Journal investigation revealed that at T and Verizon and other telecom companies left more than 2 000 toxic lead cables on poles under waterways and in soil across the U.S reporters test tested near the cables showing that dozens of spots registered lead levels exceeding EPA safety guidelines joining us now is Brett Feldman Goldman Sachs Telecom analyst good to see you Brett so talk about how this is affecting the price targets that you have for the telecom companies that you're following yeah well thanks for having me on this was a surprising issue to investors uh it's not something that had been talked about uh by the companies it's not something we had heard Regulators talk about prior to this series by The Wall Street Journal and candidly investors really don't know what to do with this information it's very unclear the extent to which this really is a new risk factor for these companies but just to put in context How concerned investors are a t and Verizon are trading at some of the lowest valuations we've ever seen an easy way of looking at that is simply looking at their dividend yields which are offering you generally over seven and a half percent right now the only times we have ever seen valuations that low for these stocks in the last 20 years is during periods of genuine Global crisis so the global financial crisis uh and the onset of covid lockdowns it has affected the way we think about these stocks not because we specifically know how to factor this into our forecast if we even need to but it's pretty clear that it's going to take the market a little bit of time to digest this and to think about what this might mean going forward and for that reason it's our view that you will probably continue to see these stocks trade at historically or near historically low evaluations at least over the near term I'm Brad it's Julie here what's interesting as well is that the companies themselves they've talked about this but they do seem to have downplayed it to some extent or what little information they've given us has sort of said that their exposure is not huge do you think that they have done a good job addressing what was in the those Wall Street Journal stories I think the narrative is still unfolding um you know initially we didn't have a lot of information to work with this wasn't a category of information that we typically got disclosure on over the last two weeks 18t and Verizon have given us a high level view to help us just think about the presence of lead sheath cables in their Network I think the point they're trying to make is that because those cables are so old um they intrinsically make up a very small portion of their networks and so we're starting to get a little bit of insight um but you go back to a point I made earlier which is that the market still doesn't really know what to do with this based on what we do know about the size of their traditional landline networks in terms of how many locations are in their regions based on some of this new disclosure they've given about the the length of the cabling you can see that ATT probably has more exposure yet Verizon has lost more market value it doesn't really make a ton of sense and I think it just shows having gotten to a point where the investment Community really thinks that they have a framework for understanding how to digest all this I mean and they acknowledged ATT data as well and these most recent earnings and during the call as well that the industry began phasing out these Replacements or the placement of these lead clad Telecom cables in 1950s but they continue to be used in the power grid and so all of that considered is the unknown from the investor perspective how much it's going to cost them to go out where mandated to to go and retrieve these cables reel them in whatever that kind of uh strategy or operation even looks like or on the other side of that if they could see severe fines you know I we have no idea how to figure out whether there could be fines or whether it could be legal action it's just too early and we don't have a framework for that um what we do is we look at it as fundamental analysts and and the point that we made is if you look at ATT for example um there are about 57 million households that are in their traditional region but they're only able to offer a Fiverr to the home internet connection to about 20 million of them today they have a huge project underway to try to convert more of those homes away from these old Telecom cases some of which might have led to really Advanced fiber cables if going forward they're going to have to spend more time with that process maybe because the local public utility commissions ask for environmental surveys or because they have to remove cabling they historically may have left in place it could elongate the time frame from transforming from being an operator of older slower networks to an operator of advanced high-speed networks and that's a really big deal if you look at Network operators with Advanced networks their profit margins are about twice the level we see at companies like ATT in their old region so any friction associated with this transition really does degrade their ability to amplify the shareholder returns that they can achieve and that's putting aside whether they might face some sort of external illegal or regulatory issue well and that's kind of what I wanted to get at as well I mean these are businesses that absent the lead issue that they're slowing right I mean listen Telecom was never a huge growth business right it was more viewed as a way for investors to get dividends for example do investors though need to change the way they look at these companies in an environment when for example so many people are cutting the cord there's a lot of discounting going on in the mobile side of the business you know how should people be thinking about them well you raise a good point um before these headlines that telecom stocks hadn't traded particularly well anyhow and and that's for the exact reason you just mentioned which is that we've seen some deceleration and growth uh during the onset of covet lockdowns Telecom providers cable operators they all saw huge lifts in demand for their services particularly their premium tiers of services the highest tiered Mobile plans were very popular the highest tiered Broadband plans are very profitable and we've come off those highs and the market has been Racing for the celebration in these categories all of these major providers reported results this week and the biggest surprise were that numbers were actually a little better than we expected we are seeing slowing we're not seeing quite as much slowing as we would have expected but what investors continue to see and what worries the market a bit is how much competition has emerged between the wireless carriers and the cable companies so just as an example the two biggest Wireless carriers in the US which are Verizon and T-Mobile added more home internet customer says home broadband Connections in this last quarter than the cable companies did but the biggest cable companies which are Comcast and Charter and is significantly more new wireless customers than we saw at the major Wireless carriers and so there's this increasing degree of competition against the backdrop of slowing growth that has the market a little bit concerned um and then finally just quickly here I wanted to ask about your top pick in this business which is T-Mobile which you just mentioned um it's up this year but not by a lot but it has pretty consistently been outperforming the Legacy providers how is it going to continue to do so yeah a great point there T-Mobile is something of a unique story in this sector so when the sector isn't seeing a lot of growth T-Mobile is and it's really because they just continue to take advantage of their acquisition of Sprint it was closed over three years ago it's allowed them to gain share in parts of the market they historically haven't participated in including rural communities and the business market and as a result they're still leading and subscriber growth they haven't captured all the cost synergies in their reported financials yet and so they're they're leading a profitability growth and most exciting I think for this company is it's the most compelling Capital return story they are in the process of a very significant share repurchase program but we expect that they will repurchase 60 billion dollars of stock over the course of this year next year in 2025 that's over one third of their total market value and during that period of time we expect that the cash flow that they generate per share will compound annually north of 20 there's nothing else category like that and I think as investors continually see visibility into that unfolding the stock will continue to outperform or really should begin to outperform more than half so far we appreciate that breakdown Brett Feldman Goldman Sachs Telecom analyst thank you so much

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Length: 9min 6sec (546 seconds)

Published: Fri Jul 28 2023