JPMorgan Upgrades AT&T Inc. Stock To Overweight Citing Strong DIRECTV Synergies

JPMorgan upgrades AT&T Inc. (NYSE:T) stock from Neutral to Overweight, in a research note published on Thursday. The sell-side research firm also revised up price target on the stock from $35 to $40, citing strong synergies from the recent DIRECTV (NASDAQ:DTV) deal, which is expected to be accomplished on June 30. The stock is currently up by 0.59% trading at $35.24 as of 10:53AM EDT.

JPMorgan updated its model incorporating synergies from DirecTV and Mexican acquisitions, which result in better earnings outlook and a positive shift in the price target. The firm also updated the valuation on AT&T stock on stand-alone basis, removing the impacts of acquisitions. The update includes a raise in second-quarter and beyond wireless service revenue given that the company is now lapping the worst of its 2014 price cuts.

JPMorgan analyst, Philip Cusick stated: “Though our upgrade is based on a cost cutting thesis including DTV synergies, lower Opex needed to support slowing Capex, and Project Agile, which should start to create savings in 2016 that accelerate to a $1.50-2b run-rate in 2017.” He believes that the company’s 5.4% dividend is too wide compared to Verizon’s 4.5%, the SPX 2.0%, and the 2.4% 10-year bond. This shows a real positivity for the stock as investors become more comfortable with dividend sustainability.

The firm believes that the days of having high growth business at DirecTV have become a past, while US video customers at AT&T and DirecTV are expected to remain stable while overall costs are expected to fall. The firm expects AT&T to focus on video efforts on the data/broadband services (DBS) business, which offers lower programming costs.

According to Bloomberg, of the analysts who cover AT&T stock, 11 rate it a Buy, 24 mark a Hold, while only three advocate a Sell. The analysts’ 12-month consensus price objective on the stock is $35.17, flat compared to the current trading price.

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