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Will Soft WarnerMedia Margins Dent AT&T's (T) Q2 Earnings?

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AT&T Inc. (T - Free Report) is slated to report second-quarter 2019 results before the opening bell on Jul 24. The company is likely to record soft performance in the WarnerMedia segment that generates a significant share of total revenues.

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

Margin Woes

The WarnerMedia segment represents the various business units of the erstwhile Time Warner namely, Turner, Home Box Office and Warner Bros. It also includes AT&T’s Regional Sports Networks in the Turner division and Otter Media.

AT&T has restructured its WarnerMedia business to focus more on video streaming service and fine-tuned its operating model with the evolving needs of customers. The company has also reorganized the management structure within WarnerMedia. Continuous leadership changes portend that the company is still missing the magic formula to rekindle its media unit. Moreover, despite industry speculations, AT&T has failed to offer a concrete roadmap to its rumored streaming service during the quarter, and only promised to launch the same in spring 2020 with an official announcement in July 2019.  

In addition, AT&T is reportedly mulling the sale of its four regional sports networks in a bid to reduce its heavy-debt balance sheet. Although no official announcement has yet been made about this deal, it signifies anticipation of rather soft business trends from these units. This is likely to be reflected in the upcoming results. (Read more: Will Healthy Top-Line Growth Buoy AT&T Q2 Earnings?)

Operating income from WarnerMedia is expected to be $1,954 million, down from $2,310 million reported in the previous quarter. EBITDA from the segment is expected to be $2,253 million compared with $2,386 million recorded in the previous quarter.

Earnings Whispers

Our proven model does not conclusively show that AT&T will beat earnings this quarter as it does not possess the key components. A stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. This is not the case here as you will see below:

Earnings ESP: Earnings ESP, which represents the difference between the Most Accurate Estimate and the Zacks Consensus Estimate, is -2.76%, with the former pegged at 87 cents and the latter at 89 cents. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

AT&T Inc. Price, Consensus and EPS Surprise


AT&T Inc. Price, Consensus and EPS Surprise

AT&T Inc. price-consensus-eps-surprise-chart | AT&T Inc. Quote

Zacks Rank: AT&T has a Zacks Rank #3. Although this increases the predictive power of ESP, we need to have a positive ESP to makes us reasonably confident of an earnings beat.

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

Stocks to Consider

Here are some companies that you may want to consider, as our model shows that these have the right combination of elements to post an earnings beat this quarter:

Verizon Communications Inc. (VZ - Free Report) is slated to release quarterly numbers on Aug 1. It has an Earnings ESP of +0.43% and a Zacks Rank #3. You can see the complete list of today’s Zacks #1 Rank stocks here.

NETGEAR Inc. (NTGR - Free Report) is scheduled to release results on Jul 24. The company has an Earnings ESP of +1.01% and has a Zacks Rank #3.

The Earnings ESP for Ciena Corporation (CIEN - Free Report) is +5.26% and it has a Zacks Rank of 2. The company is set to report quarterly numbers on Aug 29.

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