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AT&T Still Connects at Neutral

T HCOM VZ

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On Feb 7, we maintained our Neutral recommendation on AT&T Inc. (T - Analyst Report), reflecting the company’s favorable aspects like higher smartphones adoption, impressive U-verse gain and the planned investment program. These were partially offset by constant access line losses, competitive threats, heavy iPhone subsidies and federal regulations. The ace communication company holds a Zacks Rank #3 (Hold).

Why Kept at Neutral?

On Jan 24, AT&T posted fourth quarter 2012 results, with adjusted earnings per share missing the Zacks Consensus Estimate. However, revenues surpassed our expectation on strong performance from the wireless segment.

Looking ahead, we see AT&T as favorably positioned for this year, with strong growth prospects in both wireline and wireless businesses. While continued strength in smartphone and branded computing device sales are fueling growth in its wireless business, wireline is also improving on its U-verse and strategic services.

Further, lucrative acquisitions and collaborations are also expected to support the high performance level of the company over the next few quarters.

The company, through its Project Velocity IP, will invest $14 billion in the coming three years to considerably expand the wireless (investment of $8 billion) and wireline (investment of $6 billion) Internet Protocol (IP) broadband networks. We believe that the investment program will provide AT&T with a high-potential growth platform, leading to higher revenues and earnings per share.

AT&T – second largest provider of wireless services in North America after Verizon Communications (VZ - Analyst Report) – is concentrating on expanding its subscriber base with the launch of attractive handsets coupled with new data plans. Recently, the company unveiled plans to roll out re-vamped, re-engineered and re-enhanced smartphones – BlackBerry Z10 and BlackBerry Q10 – that will run on 4G Long-Term Evolution (LTE).

However, risk factors such as a saturated wireless market, persistent losses in access lines, labor union issues and aggressive pricing plans of direct competitors are likely to weigh on the company’s revenues and margins in the near to medium term.

For first and second quarters of 2013, the Zacks Consensus Estimates for earnings are 63 cents and 71 cents per share, respectively. This reflects a respective year-over-year growth of 5.1% and 7.2%.

Other Stocks

Other telecom stocks that will likely perform impressively in the coming months are France Telecom and Hawaiian Telcom (HCOM - Snapshot Report). Both the stocks carry Zacks Rank #2 (Buy).

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