Trade Update – $T: Closing Long Stock Position

by Dan October 22, 2014 1:55 pm • Commentary

Back in early August (original post below), I initiated a long position in AT&T with the thought that their generally poor Q2 results were reflective of an increasingly competitive mobile landscape, and that the iPhone 6 upgrade cycle could cause interest in the stock that had just sold off from 52 week highs and looked to be nearing some technical support.  Well, the stock made lower lows, and has since rebounded back to my purchase price and I am going to take the very small gain and move on.  My personal experience in the last few weeks with AT&T’s wireless pricing was very disappointing as I bought three new iPhones and found their pricing of the actual phones to be very near deceptive, if not blatantly so (read here).  I would also add that the company is set to report Q3 results today after the close and I have no interest in staying long in what could be slightly messy results and guidance.

Action: T sell to close long stock at $34.57 for a .29 gain, plus $0.46 dividend, for a total gain of $0.75.




Original Post August 8th:  New Trade – $T Ready to Party?

For a sleepy stock, AT&T (T) has had an active past few weeks, trading in a nearly 10% range:

T 15 day chart from Bloomberg
T 15 day chart from Bloomberg

The stock broke out to new 52 week highs late last month when Winstream (telco provider) announced late last month that they are planning to spin-off assets into a publicly traded REIT for a whole host of strategic and financial engineering reasons.

T 1yr chart from Bloomberg
T 1yr chart from Bloomberg

The technical breakout, albeit short lived, was beautiful, on massive volume, but the stock’s subsequent decline has been nasty.

AT&T is in a massive transition period as they get closer to the closing of their $49 billion take-over of DTV (announced in mid May) and as they wrestle with the increasingly competitive mobile landscape with upstarts like TMUS taking market share of the heels of aggressive pricing measures.  

When T delivered a Q2 report that had few bright spots, Bernstein analyst Paul de Sa had the following succinct summary:

(1) AT&T came in below sell-side consensus, but this was not unexpected based on repeated misses in prior quarters.

(2) AT&T is in the midst of a business-model transition in mobile that changes the meaning of many key financial and operating metrics. It will be 12-18 months before we can tell whether or not the change has been value creating

(3) To meet reaffirmed guidance for the year, AT&T’s 2H14 revenue growth will have to accelerate
significantly, although this may be possible based on accounting changes and new mobile device launches. Capex will also have to decline materially.

(4) In mobile postpaid, AT&T was less reliant on tablets for postpaid net adds than Verizon and lowered  postpaid churn, which may not bode well for Sprint and/or T-Mobile (reporting next week).

(5) In mobile prepaid, AT&T had a weak quarter due to Cricket integration, although we expect recovery in  2H14, likely at the expense of the prepaid brands of Sprint (Virgin Mobile and Boost) and T-Mobile (MetroPCS).

(6) In fixed enterprise, AT&T’s performance stabilized, consistent with our thesis of recovery in the
business-telecom market.

(7) In fixed consumer, U-verse performance was largely consistent with its historical trajectory, although the number of households with which AT&T has a fixed-line relationship continues to decline.

From a fundamental standpoint, the stock seems like a no touch, but in the current economic environment, where despite the wind-down of QE, bond yields go lower, T’s 5.47% dividend yield is likely to cause those looking for bond proxies to take a second look.

Despite the recent pop in Implied Volatility with the stock’s increased movement, options premium from a dollar standpoint seem a bit paltry to consider overwriting long stock.  For instance with the stock right here at $34.27, the Jan15 37 call, is .36 bid, or about 1% of the underlying stock price.   With two expected dividends of .46, one on Nov 1st and one on Jan 1st it seems a bit silly to sell the Jan 37 call to take in 1% and cap upside in the stock.

So we are going to keep it simple and just buy the stock here. We’d look to overwrite the position on a bounce from here where the premium we receive makes more cents!

Trade: AT&T Bought stock at $34.28