Wednesday, July 19, 2023

AT&T might spend $4 billion replacing lead cables, analysts estimate

A man holds a phone to his ear while walking past an AT&T sign.

Shoppers shop at AT&T in the King of Prussia Mall on December 11, 2022, in King of Prussia, Pennsylvania. (Photo by Mark Makela/Getty Images) 

AT&T stock (T) rose more than 7% on Wednesday morning after a court filing late Tuesday provided details on AT&T's exposure to lead-clad cables and offered some initial insight into the potential cost of removing these cables.

In separate notes to clients published late Tuesday and early Wednesday, analysts at Goldman Sachs and Morgan Stanley both estimated that the removal of these lead-sheathed cables could cost AT&T up to $4 billion.

Both firms noted AT&T market's cap had fallen by nearly $15 billion through Tuesday.

Shares of AT&T, Verizon (VZ), and Frontier Communications (FYBR) all rallied on Wednesday following AT&T's disclosure late Tuesday.

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Goldman Sachs analyst Brett Feldman and his team used Tuesday's court filing to extrapolate the cost of removal for lead cables "neither buried nor in conduit."

The estimated cost for about 60,000 miles of cables sits in a range of $2 billion to $4 billion, per Goldman's estimates.

"This illustrative calculation does not factor in time (i.e., it would likely take several years to complete a project of this scope) nor the potential to share these costs with other projects such as AT&T’s ongoing deployment of fiber," Feldman wrote in a note on Tuesday night.

Morgan Stanley equity analyst Simon Flannery also estimated potential costs of $4 billion.

The analysis comes after several Wall Street firms downgraded the telecom stock following a Wall Street Journal report that showed the telecom giants' historical use of lead-covered cables is contaminating many parts of the country.

Analysts at JPMorgan had previously downgraded AT&T as the potential liability from the lead cables was "unquantifiable."

On Tuesday, AT&T responded to the Wall Street Journal's report by providing access to a court filing from Pacific Bell Telephone Company, a subsidiary of AT&T.

The filing includes a footnote that states AT&T estimates lead-clad cables represent less than 10% of its copper footprint, which includes about two million sheath miles of cable.

The filing also provided details on the estimated cost to remove some Pacific Bell Telephone Company cables in Lake Tahoe. Goldman Sachs assumed that the roughly $34,000 to $69,000 per mile cost listed in the filing would be on the more expensive side given those cables are underwater.

Goldman's call for an overall cost of $2 billion to $4 billion is based on that cost adjustment spread across 60,000 miles of lead-sheathed cables that are not buried underwater.

Goldman Sachs maintains a Buy rating on the stock with a price target of $23, which reflects roughly 71% upside in the name prior to Wednesday's gains. Morgan Stanley maintained its Equal Weight rating and $20 price target on AT&T.

"We are pleased to get further disclosures from the industry to help investors size the potential impact of this issue; recall that we estimate that AT&T represents half of the wireline network in the US," Morgan Stanley's Flannery wrote.

"It appears that AT&T and others are taking issue with the WSJ testing methodology and it will be interesting to see what independent testing may find," Flannery said.

In the filing, Navi S. Dhillon of Paul Hastings LLP, which is representing AT&T's Pacific Bell Telephone Company, argues for leaving the cables in Lake Tahoe for testing.

"Based on our repeated testing of these cables — we have serious concerns with the Journal's testing methods and the reliability of its results and reporting," Dhillon wrote to John Kirk Boyd, the lawyer representing the California Sportsfishing Protection Alliance.

"In the spirit of transparency and informed public health, the parties should agree to maintain these cables in place to permit further analysis by any qualified and independent interested party, including the EPA, and allow the safety of these cables to be litigated with objective scientific evidence rather than sensationalized media coverage," Dhillon added.

Josh Schafer is a reporter for Yahoo Finance.

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