'Somewhat Concerned' Wells Fargo Downgrades An Indebted AT&T

AT&T Inc. T is the largest telecom company, and it's also become the world's largest non-bank issuer of debt, according to Wells Fargo — and that second fact was a driver of the sell-side firm's Wednesday downgrade.

The Analysts

Wells Fargo analyst Jennifer Fritzsche downgraded AT&T from Overweight to Market Perform and lowered the price target from $40 to $35.

The Company

The telecom company has $190 billion in debt, Fritzsche said in the downgrade note. (See the analyst's track record here.)

“The pendulum has currently shifted in favor of bond holders given the fact one of AT&T's leading priorities for cash is debt reduction,” the analyst said. “We believe AT&T has to meet its aggressive deleveraging goal in order to remain in the good graces of bond holders and to preserve future access to debt capital.”

AT&T issued a large amount of debt in its Time Warner acquisition and has since made two post-deal promises to debt holders by means of reducing leverage, Fritzsche said.

“We remain somewhat concerned about how T will prioritize its near-term uses of cash. And there are many mouths to feed."

The Shares

Fritzsche said AT&T shares will be rangebound in the near-to-medium term and named three main drivers of the downgrade.

Lack of visible stability. Weak enterprise performance and headwinds from video migration to over-the-top will weigh on results, the analyst said.
Many new “balls to juggle” with Time Warner assets. It will be difficult for the company to invest more in programming, Fritzsche said.
A focus on deleveraging may demote other priorities. The company’s promises are high-priority, but having multiple demands may not be a good sign given the surge in the competitive cable network landscape, Fritzsche said.