How to View Today's AT&T, Time Warner Court Ruling
The government's challenge to AT&T's (T) acquisition of Time Warner (TWX) wraps up in court on Tuesday, Jun. 12, 2018. The case is really about how we define media these days. Does television/cable have a separate competitive position, or is it part of the larger TV, internet, and streaming environment which includes Netflix (NFLX) , Amazon (AMZN) and other content providers?
I lean towards the broader definition. We'll find out soon if the judge agrees.
AT&T management thinks they'll be more competitive by folding TWX into their mix. That's why they bid for the company and are fighting hard to get the deal approved. If the ruling goes their way T will get much larger and have a more exciting upside.
A positive court outcome would likely send the stock higher right away. Waiting to be sure that happened almost certainly would mean paying much higher prices to buy into AT&T.
The company appears quite undervalued, even without TWX. Uncertainty about the case caused T to sell off from north of $43 to south of $32. Monday morning saw AT&T hovering in the low $34s.
As of last week's closing quote of $33.83, AT&T was offered for just 10x this year's estimated EPS while providing a 5.92% current yield. Those compare quite favorably with a 2010 through 2017 average multiple of 13.3x and a typical dividend of 5.41%.
T hasn't been available at such a low P/E since the dark days of 2009. The stock's last five "best buying opportunities" (green-starred below) all launched from higher valuations than the current one.
AT&T's three "should have sold" moments (red-starred) came when the shares fetched above average P/Es while paying sub-par yields.
A simple reversion-to-the-mean valuation could send T right up to the $45 level, about 31% above Monday morning's quote. If that takes a full year, total return would exceed 36%. What's wrong with that?
Independent analysis from Morningstar agrees. They carry a 4-star buy rating on T (without figuring in the TWX deal) while calling present day fair value as $40. Achieving that very modest rebound, over a full 12-months, would make for around 22% in total return.
Note, too, that Morningstar's visual of AT&T's price to fair value relationship shows the present price at its best discount since around March of 2009.
If the judge rules in AT&T's favor these goal prices might prove quite tame. If not, there's still plenty of justification for owning the stock anyway.
Option sellers can participate in AT&T's upside by writing some Jan. 17, 2020, expiration date put options. In-the-money $35, $37 and $40 strike prices offer nice potential gains while lowering worst-case, forced purchase prices to very attractive levels.
There's nothing to fear about owning T at prices ranging from $30.40 to $32.00 per share. The more conservative pair of those put sales only have you committing to own AT&T near its exact five-year lows.
Future stock market action can never be guaranteed. Knowing you would have succeeded more than 99% of the time during the previous half-decade, however, is about as good as it gets.
Beat the crowd that's waiting for the judge's decision before plunging into AT&T. Buy some shares, sell some puts or consider doping both.
(Amazon is a holding in Jim Cramer's Action Alerts PLUS member club. Want to be alerted before Jim Cramer buys or sells AMZN? Learn more now.)
(An earlier version of this column appeared at 7:00 a.m. ET on Real Money Pro, our site for active stock and options traders. Click here to get more columns and trade ideas like this from Collins, Mark Sebastian, Doug Kass and others.)
At the time of publication, Paul Price was long AT&T shares, short AT&T puts.