Investors tend to focus on earnings and sales. But cash flow is also a critical component of analyzing a company. It shows how money comes in as revenue, is spent on goods and services a company needs to run, and how the remainder ends up on the balance sheet.
A company with strong cash flows has enough money coming out at the end to pay a dividend to shareholders, or buy back shares, after investing in maintaining the company’s growth.
This earnings season has seen a number of companies report strong cash flow growth. One of them is telecom AT&T (T). The company also beat earnings expectations thanks to improved subscriber growth.
While shares moved higher on the news, they’re still down about 10 percent over the past year. AT&T now trades at less than 6 times earnings, a hefty valuation discount even for a slow-growth stock like a telecom.
Action to take: AT&T shares look undervalued here given the company’s improving cash flows. At present, shares yield about 7.8 percent, offering current high income and upside potential for shares.
For traders, shares could continue their recent gains. The January 2024 $17 calls, last going for about $0.17, could see mid-double-digit gains or higher in the coming weeks.
Disclosure: The author of this article has a position in the company mentioned here, and may further trade after the next 72 hours. The author receives no compensation from any of the companies mentioned in this article.