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On Feb 11, 2014,  we reaffirmed our Neutral recommendation on AT&T Inc. (T - Analyst Report). The company’s fourth quarter adjusted earnings surpassed the Zacks Consensus Estimate and also improved from the year-ago quarter.

Revenues also increased year over year and was ahead of our expectation.  The Zacks Consensus Estimate for the first quarter earnings is pegged at 68 cents per share, representing 6.97% growth.      

AT&T currently has a Zacks Rank #3 (Hold).

Why Neutral

For 2014, AT&T expects revenue growth of 2–3% and adjusted earnings per share is estimated to grow in mid single digits excluding the impact of share buybacks. We believe this optimistic outlook is triggered by contribution from wireless services.

AT&T’s wireless business, in particular the post-paid segment, is benefiting from promotional strategies that it had undertaken. The company’s pre-paid market is also flourishing as evidenced by strong customer additions. In 2013, AT&T entered the home security and automation service market with the launch of Digital Life package. AT&T is also expanding its managed security solutions including mobile security solution.

The company boasts the best Internet speeds in the industry as it is the only U.S. carrier that provides 4G network through both Long Term Evolution (LTE) and High-Speed Packet Access Plus (HSPA+) technologies. AT&T’s LTE network serves as the benchmark of mobile technology and the life-blood for operators across the world.

The company is running ahead of schedule in 4G LTE service deployment and expects to cover 300 million users by mid 2014.To support these services, the company offers several 4G LTE smartphones and tablets. Smartphone sales were solid at $7.9 million in the quarter, resulting in higher data usage. As of Dec 31, 2013, smartphone comprised 93% of all post-paid sales. AT&T collaborated with NEC Corp. for the launch of 4G LTE hardy smartphone – NEC Terrain – with the aim of expanding coverage.

However, AT&T remains challenged by aggressive pricing plans of direct competitors such as Verizon Communications (VZ - Analyst Report) and Sprint Corp. (S - Analyst Report) for iPhones and other smartphones. Further discounts on its pricing plans could hurt near-term earnings. Smaller wireless carriers also offer cost effective voice and data plans. This may negatively influence AT&T’s high-end handset sales and challenge subscriber retention.

Further, on the smartphone side, the company is facing cost headwinds as price-sensitive customers seek low-end 2G feature phones. While Apple Inc. (AAPL - Analyst Report) iPhones are enjoying a strong growth momentum, high marketing and subsidy costs associated with the product is restricting earnings.

As a result, we maintain our cautious stance on the company.

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