One way to find potential buying opportunities in the stock market is to pay attention to insider purchases. This is when insiders -- defined as C-suite executives (like the chief executive officer, chief financial officer, etc.) and directors -- buy the stock directly in the open market. It is not always a guarantee of good things to come, but when insiders decide to purchase shares themselves (as opposed to just holding the stock they receive in compensation), it should get investors' attention.
In late July, wide insider buying occurred in AT&T (NYSE: T), when eight of the 13 directors -- including CEO Randall Stephenson -- purchased shares in the open market. One week later, a ninth director, Samuel Piazza, added his name to the list. The purchases were generally between $100,000 and $250,000.
AT&T's stock has lagged this year, even after it successfully closed its acquisitions of Time Warner and ad tech platform AppNexus. Could this insider enthusiasm signal a turnaround?
The reason that AT&T is priced so low, at around nine times forward earnings, is that it has taken on a hefty debt load to make its recent acquisitions. At the same time, revenue from its core businesses is dropping across most segments:
These lackluster trends have a number of causes. In consumer mobility, mobile saturation in the U.S. and fierce competition from rivals has put pressure on postpaid consumer additions. While overall wireless subscribers grew, much of this was prepaid or business postpaid customers, while consumer postpaid customers fell. Postpaid subscribers are generally considered more favorable, due to the recurring nature of the revenue stream.
The company's wireline business solutions, which fell 4.5% adjusted, is suffering from a decline in legacy connectivity services such as landline phones and slower internet over copper. That was partially offset by newer strategic revenue, which encompasses more modern products like ethernet, broadband, and software-defined networking, along with business mobility, which includes wireless services for business customers.
AT&T's entertainment division also saw a large revenue decline due to increased cord-cutting of linear video programming. While AT&T was able to actually grow overall video subscribers, the gains were due to the company's "skinny" over-the-top DIRECTV Now offering, for which it makes less money.
AT&T is banking on bundling to keep its customers in its ecosystem, so consumers either fleeing or turning to lower-cost offerings is not what investors would like to see.
Finally, the international segment, which consists of AT&T's Mexico and Latin American operations, is currently flatlining. That segment is supposed to be a growth driver, so to see it stagnate isn't exactly great news either.
Why directors may be optimistic
There may be some reasons for the directors who bought shares to be optimistic, however. The Time Warner deal was only closed two weeks before the end of last quarter, and the company just closed its AppNexus acquisition recently.
The master plan, of course, is to utilize the customer data within the huge AT&T ecosystem of mobile, cable, and broadband to deliver more targeted ads via Time Warner's media properties. Fewer, more targeted ads, along with attractive bundling propositions, have the ability to boost customer satisfaction and enable AT&T to collect more data, in a virtuous cycle. In addition, Time Warner was already a high-margin business, which will help the company pay down debt while it maintains its dividend.
Finally, AT&T is in good position to become a leader in 5G over the next few years. The company is currently testing this next-generation LTE standard in Dallas, Atlanta, and Waco, and will roll out to Charlotte, Raleigh, and Oklahoma City later in the year.
At the current 6% dividend yield and a forward P/E ratio of just 9, all AT&T has to do is maintain its earnings power for the stock to do well. If the company can combine all its products into a more efficient ecosystem, shareholders could do even better.
Cash flow over debt concerns
While the market is understandably nervous about AT&T's debt load and near-term revenue declines, management is confident: Despite last quarter's revenue headwinds, the company raised full-year adjusted EPS and cash flow guidance.
That could indicate the integration and cost savings are going better than the market thinks. Insiders certainly seem to be optimistic given their recent share purchases. Boring old AT&T may in fact be one of the more exciting stocks to watch over the next few years as it aims to go toe-to-toe with Silicon Valley behemoths in next-gen technologies and digital advertising.
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