Computers and Technology

Tech Today: Merger Mania! Debating AT&T, Cutting AMAT



Merger mania is on, as shares of AT&T (T) decline $1.22 in early trading, or almost 4%, to $33.13, after a federal judge yesterday approved its proposed $85 billion acquisition of Time Warner (TWX).

Shares of Time Warner are up $3.97, or 4%, at $96.22.


Raymond James’ Frank Louthan, who has an Outperform rating on AT&T, observes that the Justice Department could pursue an appeal. But he thinks that “given the strong ruling in AT&T’s favor that used current laws and did not deviate into unchartered new interpretations, the basis of the appeal is made significantly more difficult, as the judge indicated he designed the opinion to do.”

Taking the bear argument, Craig Moffett of the Moffett Nathanson research boutique cuts his rating on AT&T to Sell from Neutral, and cuts his price target to $28 from $35, writing, “Be careful what you wish for.

“Time Warner will be a positive for AT&T’s income statement, at least initially,” he writes, “but it will be a negative for the balance sheet.

“The new AT&T will carry an astounding $249B of debt (inclusive of operating leases and postretirement obligations).

“If pro forma AT&T were a country, it would place 32nd on the list of highest total debt burdens, between Indonesia (at $335B) and the UAE ($220M). Pro forma leverage, on an adjusted basis, will now be 3.9x EBITDA.”

Moffett argues the safety of AT&T’s dividend becomes a serious concern at this point.

Comcast vs. Disney for real?

Of course, the broader implication is that big deals can get done in this environment, and that’s prompting a change of heart on other names this morning.

Louthan also cuts his rating this morning on Comcast (CMCSA) to Market Perform from Strong Buy, as this seems to encourage Comcast back to the table in pursuit of 21st Century Fox (FOXA) against Walt Disney (DIS).

The ruling, Louthan writeincreases “the likelihood Comcast will make a formal FOXA offer. This could lead to a bidding war with Disney, and a prolonged overhang from a 12-month regulatory review/lawsuit, and the threat of higher leverage post the deal—all of which likely keep investors away from the name.”

Comcast shares are down $1.45, or 4.5%, at $30.93.

Fox shares are up $3.13, or 7%, at $43.67.

Sprint’s M&A value

Louthan’s colleague, Ric Prentiss, raises his rating on shares of Sprint (S) to Market Outperform from Market Perform, with a $6.50 target, on the chances of its closing its proposed merger with T-Mobile US
(TMUS).

“Our standalone mid-19 fair value per share estimate for Sprint is $4.50, and our attached model of a combined T-Mobile and Sprint (NewCo) places a fair value of $85 per share on NewCo (equivalent to $9 per Sprint share), including $7B NPV of potential concessions,” writes Prentiss.

Sprint stock is up 12 cents at $5.43, while T-Mobile is up 65%, or roughly 1%, at $58.09.

Changing of the chip guard

It’s time to change one’s thinking about semiconductor manufacturing, according to RBC Capital’s Mitch Steves, who this morning raises his rating on shares of equipment maker ASML Holding (ASML) whose “extreme ultraviolet lithography,” or EUV, technology is increasingly crucial as Intel (INTC) and others bump up against the limits of conventional chip making. And he simultaneously cuts Applied Materials (AMAT) and Lam Research (LRCX) to Sector Perform.

“We’re taking a positive stance on ASML primarily due to EUV and Intel’s commentary that 10nm will be the last node without EUV,” writes Steves. “Shipments have continued to ramp for this segment of the business and this should lead to higher gross margins acting as a long-term tailwind for the company.”

As for Applied and Lam, estimates need to come down for both, he thinks, to match reality.

“With [Applied’s] potential for ~$5-6 EPS in 2020 (we think closer to $5 than $6), this would imply a current valuation of ~10-11x 2020 expectations,” he writes.

“We view this as fair given that yield issues are likely solved and Taiwan Semi has recently announced a cut to foundry expectations.”

Lam’s reliance on tools for making NAND flash memory chips is a liability as that market cools: “Since 2013, we have seen an increase in NAND WFE from $6.8B to an estimated ~$16B today. While we think the space has changed from a structural and long-term perspective (5-year horizon), we would not be surprised to see total capital spending decrease near-term.”

ASML shares are up $4.04 at 213.38, Applied stock is down 73 cents, or 1.5%, at $50.13, and Lam is down $2.63, or 1%, at $184.30.

Microsoft’s appeal

Microsoft (MSFT) is too cheap, according to UBS’s Jennifer Swanson, who this morning reiterates a Buy rating and a $114 price target. Swanson believes the company’s Azure cloud business is a “differentiator,” according to a summary of the report by TheFlyontheWall. She also likes its “durable” on-premise software business and the way the company is bulking up on videogame content.

Microsoft shares are up 20 cents at $101.31.

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