Top Trade of the Year candidates are looking like T, VIAC, SPWR, GOLD, WBA, DIS, DOW, KHC, MO, IBM, RIO, BA, and FF.  I'm tempted to add TZA to that list!  

So who has the best 12-month catalyst aside from starting out undervalued and they also need to have a very sturdy floor around where they are now.  Then they need to have great options premiums so we can construct a very likely 300% return spread.  

T/Yodi – Not enough bang for the buck on the options.   RN makes a good point that the options will suffer on the spin-off.  Mostly I'm looking for a good catalyst to grab on to.

• AT&T has continued its seemingly never ending march lower. Losses have accelerated of late byway of a sharp 12% drop recently and are currently residing at only $24.13 a share as of 11/21/21.
• Operationally, it appears the company is actually in very good condition, with strong results in telephony, mobile adds and fiber additions.
• Capitulation may be near as the company has been dropping directly in the face of encouraging results and moves by management to refocus the company.

Since assuming the role of CEO in July of 2020, Mr. Stankey, in my opinion, has made numerous positive moves aimed at refocusing AT&T on the core business of connectivity and telephony.

Mr. Stankey has spent much of his time as CEO so far pruning non-core businesses away from the company. He has sold or wound down a large portion of the ancillary pieces of AT&T, highlighted by the Puerto Rican asset sale to Liberty Latin America (NASDAQ:LILA), among many others.

In addition, Mr. Stankey has rid AT&T of the Direct TV business via a deal with TPG Capital. Direct TV has long been a source of ridicule and distraction for the company and this deal gives AT&T 70% equity ownership of the new entity along with a $7.1 billion cash infusion, along with the ability to remove the steep revenue drops each quarter from the company's books.

 

In what appears to be the most transformative news, Mr. Stankey and the legendary John Malone in May of 2021 agreed to merge and spin off Discovery, Inc. (NASDAQ:DISCA) and WarnerMedia into a combined media powerhouse.

In conclusion, Mr. Stankey's actions since he became CEO certainly seem to indicate that he is in fact quite serious in his attempt to turn the page from the mistakes of the past and to refocus the company back to the core telephony and connectivity business.

Looking at purely the business results, since Mr. Stankey's appointment as CEO, the business has made significant strides in gaining back some of the ground lost to competition. In fact, in the last few quarters, AT&T has led the industry for wireless additions.

The AT&T of 2020 and the AT&T of mid-2022 will be two completely different organizations. Once the spin-off of WarnerMedia is completed in mid-2022, the company will be left with a clear corporate mandate from top down, to strive to be the most efficient and best telephone and internet provider in the business.

In addition to refocusing the management team, the company will have a vastly cleaner balance sheet. Management has indicated clearly that the debt balance is a very high priority and that deleveraging is a top priority for the company.

The structure of the future company looks like this idea does in fact have legs as post the WarnerMedia spin-off, AT&T looks to have roughly $166 billion in total short and long term debt. In Addition, AT&T expects to produce over $20 billion in free cash flow under its new structure ex Warner Media.

AT&T has indicated that the dividend, post spin-off would be set around 40-43% of free cash flow or around $8-8.6 billion. Using a midpoint of $8.3 billion in available free cash for the dividend and the current 7.14 billion shares outstanding, I come up with a dividend of $1.16 per share, indicating a 4.8% yield at a $24.13 price.

 

One must not forget that each share of AT&T you own will also grant you ownership in the new WarnerMedia company to be spun off. How these shares are valued has yet to be determined other than AT&T shareholders will own 71% of the newly combined company with Discovery.

The current valuation of AT&T is where the absurdity I referenced is reflected. The company as of today is valued at a PE ratio of 7.18 using 2021 estimates. The company is currently priced as if it will be filing for bankruptcy shortly.

Of course, the new WarnerMedia will not be valued at $0. The combined business is estimated to have produced over $28.2 billion in revenue and an estimated $6 billion in free cash flow in 2020.

Estimates of the equity value of the new WarnerMedia vary wildly but the consensus estimate is between $7-10 per share of value is to be spun off to shareholders. If this holds true, then at current valuations, AT&T post-merger is to be valued at between $14 and $17 per share.

This is absurd. EPS estimates have already been put together by the analyst community reflecting the spin off and AT&T is expected in 2022 to earn $3.20 per share. Using a mid-point of $15.50 price post spin, the company is potentially valued at a 4.84 PE ratio.

I can see no logical argument for that type of valuation for a company projected to continue growing at mid-single digits, with an improved balance sheet and no true threats to its overall business.

We didn't make a change last week, we did make changes in October that leave us very bullish as those short Jan calls are certain to go worthless so we're just letting the big spread ride for now and the Jan puts will just get rolled – I'm certainly fine with the 2024 short $25s.  No excuse not to have this stock in your portfolio and, on that basis alone, I still kind of like it for Trade of the Year. 

I can't back off $25 being a floor (even though we're below it) so the short 2024 $25 puts at $5 looks like free money to me.  So let's say we did this:

• Sell 15 T 2024 $25 puts for $5 ($7,500) 
• Buy 50 T 2024 $23 calls for $3.50 ($17,500)
• Sell 50 T 2024 $27 calls for $2 ($10,000) 

That is net $0 on the $20,000 spread that's $7,500 in the money at $24.50 and the worst case is owning 1,500 shares at net $25 with their $1.50(ish) dividend for the rest of your life – and that's before you sell more puts and calls to add to the income.  When the worst case sounds like a trade you'd want to make anyway – it's a good spread!