Good morning! Today’s word count is 1,943 words, or a 9-minute read. Let’s get to it:
Market Summary (11:42am ET): “Investors are cautiously optimistic that President Trump’s health condition will improve and former Vice President Joe Biden’s rising lead in the polls means less uncertainty,” WSJ writes.
- S&P 500: 3,393.90 (+1.36%)
- Nasdaq: 11,256.37 (+1.64%)
- Bitcoin: 10,719.91 (+0.40%)
- U.S. 10-Year: 0.753%
Justin Oh’s Quick Read
Read No. 4 for more context behind AT&T’s ($T) business. I believe at $28.50, AT&T stock has a favorable risk/reward profile. It generates a lot of cash and trades at 6.9x EBITDA and an over 10 percent levered free cash flow yield. That means the company generates over $10 of cash for every $100 of stock an investor buys.
AT&T has some long-term challenges with paid television, but also has upside potential that consensus estimates aren’t giving it credit for. And while we wait, AT&T’s juicy 7 percent dividend yield should be more than enough to keep an investor satisfied in the meantime.
We’re putting a $35 price target on the stock, and it looks like a solid holding in the Value portion of your portfolio. Although we are capital appreciation and growth investors at heart, we have to admit that it is also one of the better income-generating investments for those who may be older or need supplemental income via dividends.
Regal Cinemas Suspending Operations at All U.S. Locations
Say goodbye to movie-going. Cineworld, the world’s second-largest movie theater chain, is suspending operations at all 663 of its U.S. and U.K. locations due to pandemic-driven uncertainty, WSJ reports.
It only took about two months. Varying state and local guidelines allowed roughly two-thirds of U.S. theatres attempted to reopen in August, with Christopher Nolan’s “Tenet” leading the way. But even a hotly anticipated blockbuster couldn’t bring viewers back in droves, and “Tenet” only scrounged up $45.1 million in the U.S. and Canada.
Hollywood is scared. If “Tenet” can fail, studios don’t want to risk a low turnout on some of their most lucrative projects.
- Disney’s “Mulan” and Universal Pictures’ “Trolls World Tour” went the direct-to-consumer release route.
- Warner Bros. moved “Wonder Woman 1984” back to Christmas, Disney pushed back “Black Window” six months and the latest James Bond installment, “No Time To Die,” was delayed to next year.
Theatre companies are equally worried. “We are like a grocery shop that doesn’t have vegetables, fruit, meat,” Cineworld CEO Mooky Greidinger said.
- Cineworld has struggled since Covid-19 upended the economy in March, with revenue tanking almost 70 percent in the first half of 2020.
- The National Association of Theatre Owners said 69 percent of small and midsize theatre companies could go bankrupt or permanently close if the “status quo” continues.
Making Matters Worse: New York and California have yet to reopen theatres, making the roughly $11 billion North American theatrical market significantly less lucrative.
Movie theater stocks are too dangerous to touch because of the considerable amount of uncertainty that remains. The movie theater industry was already under siege even before the crisis due to the shift towards at-home streaming services.
As an example, AMC Entertainment Holdings ($AMC) had stagnant revenues and declining EBITDA (“profits”) in 2019. Now, the pandemic has dealt a potentially crippling blow. AMC Entertainment Holdings ($AMC) has enough liquidity to get through to the end of 2021 and was in the process of opening its theaters. But it looks like a lack of movies may now threaten any reopening plan. AMC has burned through $547 million of cash this year, and even if folks return to 2019 attendance levels by the end of 2021, AMC will be left with a staggering amount of debt. I’d guess that AMC has a very high likelihood of going through Chapter 11 Bankruptcy within the next three to four years.
Cineworld ($CNNWF) is in a similar boat, being heavily debt-laden without a clear recovery path. However, Cineworld looks to be better situated since it is spread out across global markets and has some growth drivers.
Among the movie theater stocks, Cinemark ($CNK) is the healthiest and would be the best “return to theaters” play since it has the healthiest balance sheet and largest cushion to wait for a recovery.
Facebook Says Government Breakup of Instagram, WhatsApp Would Be ‘Complete Nonstarter’
Facebook offered a preview of its antitrust defense in the form of a 14-page document outlining that “a government effort to break up [the social media giant] from Instagram and WhatsApp would defy established law, cost billions of dollars and harm consumers,” WSJ reports.
Eye on Big Tech: Facebook has faced a slew of issues on how the company impacts politics, privacy and the regulation of speech. But the foremost concern is whether Facebook illegally reduced competition in the social media space by buying Instagram (2012) and WhatsApp (2014).
- The FTC reviewed both deals without objection.
Prepare for battle: The House Antitrust Subcommittee is expected to release findings of its investigation into Facebook, as well as Apple, Google and Amazon, later this month.
- Last month, WSJ reported the Federal Trade Commission was getting ready to potentially file a complaint against Facebook before 2020 ended, capping a series of government probes into tech giants.
- The government already approved the deals.
- Instagram and WhatsApp are successful because Facebook built them up.
- Unwinding the agreements would cost billions and harm the user experience.
The Government Side: A antitrust case could argue Facebook made “serial acquisitions to reduce competition,” a factor the FTC couldn’t consider during its original reviews. Plus, Mark Zuckerberg himself used anti-competitive language when describing a potential Instagram deal in a series of 2012 emails (the FTC did have these emails when clearing the merger, though).
“For all the rhetoric, I’d guess a breakup would look like how the government broke up Wall Street investment banks from traditional banks — by regulating internal separation rules. A breakup will remove some advantages and synergies, but we’re still not selling my favorite Big Tech stocks just yet. They will still have massive mindshare and scale advantages, and we’ve seen the oligopolistic Wall Street banks do very well despite their intense regulation.”
AT&T CEO Says Big HBO Bet Will Pay Off in Long Run
AT&T’s transformative journey from telecom giant to “Hollywood heavyweight” has put the company in a precarious position. But CEO John Stankey “urged patience in a recent interview with WSJ, saying that some of the company’s bets will take years to pay off but were the right choices long-term.”
The Problem: Following the acquisitions of DirecTV ($49 billion in 2015) and Time Warner ($85 billion 2016, although the deal closed in 2018 due to an antitrust challenge), AT&T became and remains the most indebted non-financial company.
The Complication: AT&T can’t earn any return on investment with Warner Bros. studios severely hampered by the pandemic. HBO Max, AT&T’s new streaming service billed as a competitor to Netflix, has been slow out of the gate. In July, the platform reportedly crossed four million subscribers compared to Netflix’s 182.8 million. It also doesn’t help that consumers are dropping DirecTV faster than HBO is growing.
- “The company’s telephone rivals have meanwhile been bulking up their wireless businesses through acquisitions.”
The Plan: Stankey, who took the chief executive job this summer, hasn’t been deterred by the 27 percent slide of AT&T’s stock price this year. Instead, he’s doubling down by:
- Bundling HBO Max’s offering with wireless and broadband packages.
- Expanding the company’s fiber-optic cable installations.
- Preserving cash and keeping its “rich” dividend in place by halting stock buybacks.
- Scanning for divestiture opportunities, with DirecTV and Cartoon Network as possibilities.
AT&T ($T) is a very stable business, and most of its profits come from recurring wireless, fiber broadband and B2B wireline services. Its wireless business has faced some COVID-related challenges (losing roaming and overage fees) but remains very strong. Broadband also remains strong, with growth in its home fiber product (I have also now switched to AT&T Fiber).
A risk to the business is declining television volumes as people move towards streaming services. The critical thing to watch is if they can recapture a lot of this through a big push with HBO Max. Another risk is that they have a lot of debt, but the company has committed to reducing it and has paid down over $20 billion in debt since the Time Warner acquisition.
It’s a really stable business that does have some long-term pressures but also has return-from-COVID upsides as well. AT&T should see more robust broadband and wireless profits after COVID is over and has some upside potential with 5G, Fiber, and (maybe) HBO. It is also targeting cost savings and operational efficiencies of $6 billion over the next two years. It’s possible AT&T’s EBITDA is more likely to grow in the next two to three years versus consensus estimates of being negative to flat.
What’s Going On
To The Stand: “[Facebook CEO Mark Zuckerberg and Google CEO Sandar Pichai], plus Twitter CEO Jack Dorsey, have to go back to Washington—virtually, of course—just before the election to answer questions from U.S. senators about how they moderate speech on social media apps, among other topics, according to Politico. The Oct. 28 hearing is ostensibly aimed at trying to weaken the legal immunity these companies enjoy with respect to comments and videos their users post.”
Trumpdate: “President Trump remained hospitalized with Covid-19 on Monday after seeking to project confidence and vigor over the weekend, as his doctors offered conflicting signals about how he is faring with the unpredictable illness. The president’s physicians are expected to deliver another update on his condition on Monday. Doctors said Sunday that the president’s vital signs were stable, he wasn’t experiencing shortness of breath, and he has been fever-free since Friday.”
Hit The Raise: The profitable exercise tracking app Strava hired an adviser to raise between $150 million and $400 million, Color Screens collected $80 million to replace glass doors in store cooler aisles with digital displays, Strike Graph pulled in $3.9 to automate security audits, Einride netted $10 million for its autonomous electric cargo pods and former Uber executive Emil Michael filed plans with the SEC to raise $250 million in an IPO for a new tech SPAC.
Alarming Scope: “The head of emergencies at the World Health Organization said Monday its ‘best estimates’ indicate that roughly 1 in 10 people worldwide may have been infected by the coronavirus — more than 20 times the number of confirmed cases — and warned of a difficult period ahead.”
Back and Forth: “The Trump administration filed court papers Friday seeking to overturn a federal magistrate’s Sept. 20 ruling that stopped a U.S. ban on China’s ubiquitous messaging and e-commerce app WeChat.”
Two For One: “Oracle co-founder Larry Ellison’s pursuit of a deal with TikTok could win him two prizes at once: a flashy new customer for his company’s lagging cloud-computing business and a victory over a fierce rival.”
Hot New Collab: “Chinese e-commerce giant Alibaba will invest in Swiss duty-free retailer Dufry and the two companies have agreed to form a joint venture.”
Lock, Stop and Barrel: “Cisco Systems is acquiring Portshift, an Israel-based cybersecutity company whose software protects applications running on cloud providers.”
That Ain’t It Chief: “Exxon Mobil Corp. has been planning to increase annual carbon-dioxide emissions by as much as the output of the entire nation of Greece, setting one of the largest corporate emitters against international efforts to slow the pace of warming.”
Heartstrong Deal: “Bristol-Myers Squibb said on Monday it would buy MyoKardia for about $13 billion to bolster its portfolio of heart disease treatments, as it seeks to reduce some of its dependence on cancer drugs.”