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On Feb 7, we maintained our Neutral recommendation on AT&T Inc. (T - Analyst Report). The company has strong growth prospects including robust subscriber additions, growing demand for mobile Internet, faster fiber deployment, admirable U-verse gain and a healthy balance sheet. These are partially clouded by a saturated wireless market, persistent losses in access lines, labor union issues and aggressive pricing plans of direct competitors.

Why Kept at Neutral?

We believe AT&T is experiencing strong momentum in both wireline and wireless businesses. Continued strength in smartphone and branded computing device sales are fueling growth in its wireless business. Wireline is also improving with continued growth in its U-verse and strategic services.  

The company displays the industry-best Internet speeds and has a wide coverage of 4G Long Term Evolution (LTE) services. The company has, currently, covered about 200 million with the services and expects to achieve the target of connecting 90% of 300 million people by 2013-end. Further, the carrier’s Mobile Share plan is gaining high popularity among people with nearly 10 million subscribers already under its belt. Management intends to launch new high-tier plans in the coming quarters.

AT&T is also looking at opportunities to improve its growth profile through a number of strategic initiatives. The company’s agreement with Verizon Wireless to acquire spectrum licenses is expected to boost its position substantially within the sector. Various lucrative alliances along with a well-designed investment program will likely raise the earnings and revenue levels in the near to medium term.

Nevertheless, the company faces a number of risk factors such as a competitive telecom environment, constant upgrades in technology, failure to succeed in spectrum auctions and a hefty iPhone subsidy.  

For the second and third quarters of 2013, the Zacks Consensus Estimates for earnings are 71 cents and 67 cents per share, respectively. This reflects a respective year-over-year growth of 6.9% and 8.3%.

Other Stocks

Other telecom stocks that will likely perform impressively in the coming months are Shenandoah Telecommunications Co. (SHEN - Snapshot Report) – that has a Zacks Rank #1 (Strong Buy). VimpelCom Ltd. (VIP - Snapshot Report) and Verizon Communications Inc. (VZ - Analyst Report) hold Zacks Rank #2 (Buy) and are likely to outperform in the market.

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