Prior to AT&T’s (T) $85.4 billion bid for Time Warner (TWX) on October 22nd the stock had already been in a fairly sharp downtrend from its 52 week highs made in early July. The stock had a peak to trough decline of nearly 18%, but in the last couple weeks the stock has caught a bid, up nearly 10% in a straight line since Nov 15th:
Yesterday the stock broke above the downtrend that had been in place since August, but stopped on a dime at the stock’s 200 day moving average (yellow line).
The obvious conclusion from the recent strength is the likelihood that the new administration views the proposed merger in a more favorable light than a Democratic White House might have. But also, as the velocity of the upside rate move slowed, yielders like Utilities, Telcos and Consumer Staples have started to firm up. This deal is not expected to close for a year, and I suspect there will be plenty of stops and starts in the approval process which is why it might make sense to evaluate the stock on near term fundamentals and of course valuation and yield.
Wireless growth has stagnated (and become a lot more competitive given smartphone saturation the U.S.), evidenced by the company’s Q3 report that showed low single digital revenue growth, largely the result of DirectTv (which they bought for $49 million in mid 2015) while their U-Verse Cable offering saw sub declines. Just this week T launched their over the top DirectTv streaming service for $35 a month offering incentives for T wireless subscribers to stream content without a limit to their data plan. AT&T is clearly focused on creating a content and distribution stack with wireless, cable and streaming, placing multiple bets on distribution.
We have seen this movie before, we know how it ends (bundle to unbundle), but for the time being there is no reason why investors should not give them the benefit of the doubt, as the stock’s current 5% annual dividend yield should serve as a decent buffer for the time being.
If the stock was to find resistance in the high $30s and was rejected back to the recent lows, a long entry coupled with a short term over-writing strategy (selling 2 month out, out of the money calls) might make sense as investors get greater clarity about the TWX deal, as I suppose T will start to dictate competitor behavior and ultimately regain some pricing power upon assemblage of the behemoth. This one is on our radar.