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Analyst Blog

On Aug 6, 2014, we issued an updated research report on telecom major AT&T Inc. (T - Analyst Report). Strong momentum in both its Wireline and Wireless businesses is expected to boost the company’s performance. For full year 2014, AT&T expects revenue growth of 5% along with stable margin improvement, while adjusted earnings per share (EPS) growth is estimated at the lower end of the mid-single-digit range. However, stiff competition and shortage of spectrum could hurt the company’s performance.

The carrier stated that it is experiencing an improvement in its wireless business, in particular the post-paid segment, owing to its changed subsidy model, giving customers greater choice of equipment and service plans. The company’s Mobile Share plan is also gaining popularity with over 24 million subscribers comprising about 44% of the postpaid base.

AT&T remains focused on its project VIP initiative, which targets business expansion. These initiatives target 4G LTE expansion, spectrum and network capabilities enhancement, 8.5 million new U-verse service customers and the addition of 57 million broadband users, covering 75% of the company’s wireline footprint by the end of 2015. Further, the company is also seeking expansion of its fiber network to include 1 million additional customer locations by 2015. This project underlines the company’s efforts to meet the growing demand for high-speed Internet. We believe that this investment program will provide AT&T with a high-potential growth platform for revenues and earnings.

Within wireline, growth will be driven by strong business revenues and enhanced strategic services. Consistent subscriber growth in the U-verse segment is expected to continue in the coming days, leading to higher revenues. Additionally, the services bundled with U-Verse are also complementing AT&T’s success.

Acquisitions and strategic collaborations also play a major role in shaping AT&T’s growth story. In May, the carrier signed a definitive agreement to buy DIRECTV (DTV - Analyst Report) for $48.5 billion. The planned acquisition of DIRECTV will promote AT&T in the domestic pay-TV business to the second-largest position. It will also boost the company’s earnings through enhanced video offerings and reduced programming costs.

Despite such strengths, the company faces some near-term weaknesses. In a saturated wireless market, spectrum crunch has become the major issue in the U.S. telecom industry.  To add to the woes, the Federal Communication Commissions (FCC) has approved a plan, which reserves part of the airwaves in the upcoming spectrum auction next year for carriers having nominal low frequency airwaves.

AT&T’s wireline division is struggling with persistent losses in access lines as a result of competitive pressure from voice-over-Internet protocol (VoIP) service providers and aggressive triple-play (voice, data and video) offerings by the cable companies. These are continually weighing on the company’s revenues and margins.  AT&T currently has a Zacks Rank #3 (Hold).

Other Stocks

Better-ranked stocks in the industry include China Mobile Limited (CHL - Snapshot Report), SK Telecom Co. Ltd. (SKM - Analyst Report). CHL sports a Zacks Rank #1 (Strong Buy) while SKM holds a Zacks Rank #2 (Buy).

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