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I don't typically write about low-growth companies, but when I do, I write about AT&T (T). I'll be honest from the get-go. I can't say anything positive about AT&T's growth prospects right now. Earnings and revenues declined during the COVID-19 epidemic, earnings growth should be limited in future years, and there doesn't appear to be a clear catalyst to power EPS substantially. Moreover, the company's stock has been down by 33% over the last 5 years, making AT&T a clear underperformer in recent times.

However, let's forget about the current low growth moment and focus on several positive factors that can move AT&T's stock price higher from here.

• First, the stock is cheap. At just 7.4 times this year's EPS estimates, AT&T is cheap, dirt cheap even, I would say.
• Second, AT&T pays out a very nice dividend. 8.4% is very generous and makes up for some of the growth shortcomings on the company's side.
• Third, perhaps most importantly, the WarnerMedia spinoff should unlock substantial value for shareholders.
• Finally, with WarnerMedia's spinoff, we should see better operational efficiency and profitability at AT&T, and we should see a worthwhile growth venture with WarnerMedia independent of AT&T.

Let's Talk About AT&T's Valuation

Most people probably know that AT&T is relatively cheap, but I want to stress just how cheap the company is right now. AT&T should deliver around $3.36 in EPS this year, which amounts to a P/E ratio of roughly 7.4 at its current $24.80 price. Just how cheap is this?

Well, AT&T is about four times cheaper than the average stock in the S&P 500 right now. Even AT&T's closest competitor, Verizon (VZ), trades at a multiple that is 24% above AT&T's here. Comcast (CMCSA) shares similar business characteristics with AT&T, trades at a multiple of more than double AT&T's. So, what is wrong with AT&T right now?

Perhaps nothing is wrong with the company, but the market likes growth and rewards growth companies substantially with much higher P/E ratios right now. However, we need to consider that things change, rotation occurs, and investor appetite could shift towards value soon.

Therefore, we could see rotation into value, ultra-low P/E ratio names like AT&T in future months, especially if a more defensive environment returns to Wall St. In such a scenario, we could see AT&T's P/E ratio tick up to a 10 or an 11 even. While this may not seem drastic, it would amount to a 35-50% move in AT&T's stock from current levels.

Don't Forget About The Dividend

Some market participants may say that "cheap" is not a good enough reason to buy AT&T right now. However, on top of being remarkably cheap, AT&T delivers a very generous $2.08/8.4% dividend as well right now. This yield is a very high dividend, and AT&T has been increasing it annually for many years. Moreover, I think AT&T can resume its dividend growth program once the company concludes its WarnerMedia spinoff.

WarnerMedia Spinoff Should Unlock Significant Value

The WarnerMedia spinoff is set to take place by mid-2022 and should unlock substantial value for shareholders. Moreover, the standalone AT&T company should become easier to manage and will likely become more efficient and profitable. AT&T plans to spin off WarnerMedia in a deal that would provide AT&T with $43 billion and enable AT&T shareholders to receive stock representing 71% ownership of the new company.

This deal seems highly beneficial for several reasons. First, AT&T could use the cash. The company is heavily indebted, and the $43 billion can be utilized to pay down AT&T's massive debt load. The debt paydown would result in a leaner, more efficient company with lower interest payments. This dynamic should translate into better efficiency and higher profitability for AT&T.

Additionally, spinning off WarnerMedia will be a relief, as the culture clash was evident from the beginning. WarnerMedia is a powerful company on its own, but with the AT&T takeover, many prominent voices likely got suppressed. AT&T's management probably made many missteps, and numerous poor decisions were likely implemented due to the mismanagement of WarnerMedia under AT&T's regime. I am not a fan of certain mergers, and while the AT&T/WarnerMedia merger made some sense on paper, it had a culture clash written all over it from the start.

WarnerMedia is a creative company that creates some of the best content in the world. AT&T seems like a highly structured managerial style hierarchy that tries to optimize efficiency and maximize profits at every turn. The problem with this dynamic is that talent and creativity get stifled, the value gets lost, and the growth story diminishes.

Therefore, both companies should do much better independent of each other. WarnerMedia, in particular, should do well as its HBO Max platform has substantial growth potential. The platform already has around 45 million subscribers in the U.S. alone and expects to have roughly 70 million subscribers worldwide by the end of 2021. Additionally, HBO Max could have 120-150 million global subscribers by 2025.

Right now, it is challenging to get a fair valuation for WarnerMedia. Still, I suspect the Discovery/WarnerMedia empire will be valued at a substantial premium to what WarnerMedia is priced at now under AT&T. Moreover, once the company is spun off, it could show significant growth potential, and its valuation could climb quickly in future years.

So, What Is WarnerMedia Worth?

With a projected $52 billion in revenues and a projected $14 billion in operating income in 2023, the Discovery/WarnerMedia juggernaut will be among the most influential streaming/entertainment industry players. In comparison, Netflix (NFLX) delivered roughly $28 billion in revenues and $6.5 billion in operating income over the trailing twelve months. This revenue/operating income is roughly half of what Discovery/WarnerMedia is anticipated to make, yet, Netflix's valuation is $300 billion.

Alright, so Netflix's valuation may be a stretch for WarnerMedia/Discovery. There is no way that the company would pull a $300 billion market cap, never mind a $600 billion one. Let's look at Disney (DIS) for comparison, as the company produced similar figures (as is expected for WarerMedia/Discovery) in recent years. Now, Disney is valued at $290 billion.

Still too rich? Fox Corp. (FOX) doesn't have a strong presence in streaming, yet its valuation is nearly double its revenues. A similar valuation on WarnerMedia/Discovery would equate to around $100 billion. Finally, if we take the $85 billion figure that AT&T spent on WarnerMedia, at 71%, we would arrive at a valuation of $120 billion (combined with the Discovery 29%).

In my view, we will likely see a valuation of $100-120 billion for the combined company, which is a substantial discount to what WarnerMedia could be worth with its HBO Max streaming potential. I also believe that the new company will produce growth, and its valuation could increase substantially quite quickly. Furthermore, even 71% of $100-120 billion is more than WarnerMedia's depressed value right now under AT&T's no growth grip. Therefore, the spinoff is a very favorable development and should be met with optimism from shareholders.

The Bottom Line

I'm a recent AT&T shareholder, and I am looking forward to the value proposition that the WarnerMedia spinoff should deliver. I suspect that AT&T's share price can move up notably (35-50%) into the anticipated deal. Furthermore, I expect the standalone company AT&T to be more efficient and profitable following the WarnerMedia spinoff. In addition, shares in the new WarnerMedia/Discovery venture should behave more as growth company stock and should move up notably after the spinoff concludes.