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What's in the Offing for AT&T (T) this Earnings Season?

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U.S. telecom behemoth AT&T Inc (T - Free Report) is slated to release third-quarter 2017 results, after the market closes on Oct 24.

 

 

 

Last quarter, AT&T delivered a positive earnings surprise of 6.76%.  The company’s bottom line was at par with the Zacks Consensus Estimate in three of the previous four quarters, with an average beat of 1.69%.

 

Let’s see how things are shaping up for this announcement.

Factors at Play

We remain concerned about AT&T’s operation in the highly competitive and saturated domestic wireless industry. Spectrum crunch is a major issue in the U.S. telecom industry. AT&T’s continuous efforts to attract customers with attractive discounts as a counteractive measure against rival carriers like Sprint Corp (S - Free Report) and T-Mobile US Inc (TMUS - Free Report) increase marketing costs. The costs associated with the promotional offers led to high cash burn and increased expenses. The company’s wireline division continues to suffer from persistent losses in access lines owing to competitive threats from voice-over-Internet protocol (VoIP) service providers and aggressive triple-play (voice, data, and video) offerings from cable companies.

We believe that these factors have led to the company’s disappointing price performance. In the past three months, shares of AT&T have declined 2.2% compared with the industry’s gain of 0.4%.

 

 

When compared with the market at large, the stock’s performance looks miserable, as the S&P 500 index is pegged at 3.3%.

 

 

 

On the flip side,  AT&T’s plans to spread its 5G technology trials to three new cities - Waco, Kalamazoo and South Bend by the end of 2017. The initiative is based on its 5G expansion strategies. Deployment of 5G-based services complements the company’s high-speed broadband services. AT&T’s NetBond is gearing up to offer multiple cloud-to-cloud connections. The company is targeting customers by offering a combo of wireless and video services. Meanwhile, AT&T is reportedly planning to sell a major part of its Latin American pay-TV operations. AT&T launched its own Android tablet, Primetime. The AT&T-Time Warner pending deal awaits nod from Brazil and United States.

Additionally, we appreciate AT&T’s efforts to reward shareholders with a quarterly dividend of 49 cents per share on the company’s common shares, payable on Nov 1, 2017, to stockholders of record at the closure of business on Oct 10, 2017.

A Closer View on Certain Important Metrics 

Improvement in subscriber addition holds promise for AT&T in the soon-to-be-reported quarter. The Zacks Consensus Estimate of postpaid wireless subscriber addition for third quarter is 130 million.

The prepaid wireless segment is also expected to perform well in the third quarter of 2017, with net subscriber addition of 270 million.

Postpaid churn (another crucial metric for the wireless industry) is estimated to be 0.01% for both the Business Solutions and Consumer Mobility segments by Zacks Consensus.

Earnings Whispers

Our proven model does not conclusively show that AT&T is likely to beat the Zacks Consensus Estimate this quarter. This is because a stock needs to have a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. Unfortunately, that is not the case here as elaborated below.

Zacks ESP: AT&T has an earnings ESP of -0.96%. This is because the Most Accurate estimate is at 74 cents while the Zacks Consensus Estimate is pegged at 75 cents. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: AT&T has a Zacks Rank #3 which increases the predictive power of ESP. However, the company’s negative ESP makes surprise prediction difficult.

We caution against stocks with a Zacks Rank #4 or 5 (Sell rated) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Key Picks

Here are some companies from the broader Computer and Technology sector , which houses AT&T, and have the right combination of elements to post an earnings beat this quarter.

T-Mobile US has an Earnings ESP of +1.19% and carries a Zacks Rank #3. You can see the complete list of today’s Zacks #1 Rank stocks here.

The company is expected to report third-quarter 2017 results on Oct 23. Its earnings surpassed the Zacks Consensus Estimate in all of the previous four quarters, with an average of 48.86%.

Windstream Holdings Inc. has an Earnings ESP of +18.03% and carries a Zacks Rank #3. The company is expected to release third-quarter 2017 earnings on Nov 6. The company’s earnings beat the Zacks Consensus Estimate in one of the previous four quarters.

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