AT&T Earnings: Brace For Impact

After a good day in telecom marked by the solid results released by peer Verizon (NYSE:VZ), AT&T (NYSE:T) will be the next U.S. giant in the space to report on its own 3Q performance. Quite a bit of the surprise factor might be absent from the print, however, as AT&T’s management has issued a partial pre-announcement in the wake of the season’s natural disasters, softness in legacy video subscription (well covered by Stone Fox Capital) and fewer handset equipment upgrades.

(Photo Credit: Business Insider)

The Street is betting on revenues of $ 40.1 billion, suggesting a -2% YOY decline that will be caused, to a small extent, by the U.S. storms and the earthquake in Mexico. Likely driving a larger piece of the drag will be legacy video, expected to see a record high, and a worrisome decrease in the subscriber base of 390,000. The projected strong user metrics on the DirecTV Now side of the business will probably not be enough to counter the DirecTV and U-verse headwinds, considering the lower per user revenue generated by the online platform. EPS is estimated to come in at $ 0.75, no lower than the earnings expectations from before the pre-announcement.

On the wireless side, and if Verizon can be used as a leading indicator, I would not be surprised to see margins dip in the YOY comparison. The Big Four carriers in the U.S. have been fighting a fierce competitive war that saw all players introduce unlimited postpaid plans in 2017 (Business Insider covered the plan comparison across the industry very well). As I have argued recently, the likely impact of these initiatives will be lower pricing and network cost pressures to support the large data services. On a more positive note, AT&T shareholders are probably hopeful to see postpaid net adds maintain the momentum gained in 2Q17, as well as churn at or around 1% – which would be in line with management’s October statement that it “continues to see low postpaid phone churn levels.”

Considered by me to be one of AT&T’s less-talked-about jewels, Mexico mobility could have a tough 3Q17 in the wake of the natural catastrophe in the country. But regarding this piece of the business, I continue to hold a long-term view that the runway is set for AT&T to continue to generate solid growth in the region.

My thoughts on AT&T stock

The last few months have not been a walk in the park for the giant Dallas-based telecom company. With headwinds hitting from many directions (at times literally so, in the case of September’s hurricanes), the stock has suffered a rarely seen -10% decline in a short period of only two weeks and is now back to February 2016 levels.

Chart

T PE Ratio (Forward) data by YCharts

Company/Ticker Forward P/E LT EPS Growth Forward PEG
AT&T (T) 12.2x 3.8% 3.3x
Verizon (VZ) 13.2x 3.3% 4.0x

The silver lining, however, is that T hasn’t looked this inexpensive in a while – since January 2016 on a forward P/E basis, to be more precise. Assuming that its dividends will be safe (check out this great article on the subject) and, better yet, will continue to grow in a near-straight line like they have over the past 30 years, the company’s impressive 5.5% trailing yield makes an investment in the stock look more like a convertible bond play. In other words, investors that buy T today collect on the very rich quarterly payments with the option of benefiting from the eventual appreciation in the stock price over time.

Call me a biased shareholder, but despite the known challenges, I find an investment in T at the current depressed levels a rare opportunity ahead of what I believe will be positive long-term catalysts for the company.

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Disclosure: I am/we are long T.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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