First Quarter Flashback
AT&T (T) reported better-than-expected first quarter results, with adjusted earnings per share of 59 cents beating the Zacks Consensus Estimate of 55 cents, representing a 7.27% positive earnings surprise. However, net income slid 20.8% year-over-year, hit by a $995 million non-cash charge associated with the recent federal health care overhaul.
Revenues of $30.6 billion were marginally below the Zacks Consensus Estimate of $30.7 billion and improved 0.3% year-over-year on the back of wireless strength. Ma Bell registered a net gain of 1.9 million wireless subscribers (the largest first-quarter net addition ever), driven by increased smartphone penetration (especially iPhone) and healthy adoption of connected devices. ARPU (average revenue per user) was boosted by healthy data growth while churn was the lowest ever.
On the wireline side, growth momentum for U-verse video and broadband service continued, helping AT&T to partly offset the precipitous decline in its legacy fixed-line voice business.
We have discussed the quarterly results at length here: AT&T Beats but Profit Dips
Agreement – Estimate Revisions
Estimates have been trending upwards since the first-quarter results, manifesting a clear directional agreement. Out of a total of 33 analysts currently covering the stock, 26 have raised their estimates for 2010 over the last 30 days, with just a couple of negative revisions. A similar trend applies to the estimates for 2011.
The upswing in estimate revisions is a reflection of the positive earnings surprise, healthy wireless and U-verse metrics, strong momentum for smartphones/integrated devices and visibility for margin expansion across wireless and wireline footprints. This strong positive sentiment not only exerts a meaningful impact on the Zacks Rank but also reflects the potential for significant upward pressure on the stock.
Magnitude – Consensus Estimate Trend
The magnitude of revisions for 2010 and 2011 are static over the last 7 days. However, there has been an increase of 5 cents and 7 cents for 2010 and 2011, respectively, over the past month. The current Zacks Consensus Estimates for 2010 and 2011 are $2.25 and $2.44, respectively, reflecting year-over-year growth rates of 6.76% and 8.17%.
AT&T Stays at Neutral
We remain encouraged by AT&T’s ongoing efforts to upgrade its wireless network and acquisition initiatives to expand customer base and coverage zones as the US subscriber population reaches maturity. Other positive aspects are represented by the higher dividend payouts and opportunity for free cash flow and margin expansions through aggressive cost containment. Sustained growth across AT&T’s U-verse footprint (TV & broadband) also remains intriguing.
We also expect that the iPhone, which has been the lifeblood for AT&T’s wireless business, will continue to perform in line with expectations. The iPhone has a greater contribution to ARPU than the regular handsets and iPhone subscribers use more data services, which continue to boost data revenues and margins. As such, the iPhone has a major impact on AT&T’s earnings performance and share price.
Moreover, the addition of Apple’s (AAPL) new tablet PC “iPad” has not only opened a fresh avenue for growth in wireless but also effectively complements the carrier’s new 3G HSPA 7.2 network, which has doubled the existing 3G network throughput. AT&T is adding fiber backhaul to cell sites as it prepares for a smooth transition to 4G Long-term Evolution (LTE) networking with trials expected to commence this year.
Following a similar move by its archrival Verizon (VZ), AT&T has slashed the tariffs for its unlimited voice services. While this price discount may drag near-term earnings to some extent, the move is expected to boost operating results in the long run.
Nevertheless, we maintain a cautious approach due to the weakening demand of wireline voice services, decelerating wireless contract customer growth and the ongoing price and promotional war. Moreover, AT&T may lose its iPhone exclusivity in 2010 and there is mounting speculation about Verizon selling the device. Consequently, we remain on the sidelines maintaining our Neutral recommendation on AT&T, which is supported by a Zacks #3 Rank (Hold).
About Earnings Estimate Scorecard
Len Zacks, PhD in mathematics from MIT, proved over 30 years ago that earnings estimate revisions are the most powerful force impacting stock prices. He turned this ground breaking discovery into two of the most celebrating stock rating systems in use today. The Zacks Rank for stock trading in a 1 to 3 month time horizon and the Zacks Recommendation for long-term investing (6+ months). These “Earnings Estimate Scorecard” articles help analyze the important aspects of estimate revisions for each stock after their quarterly earnings announcements. Learn more about earnings estimates and our proven stock ratings at http://www.zacks.com/education/.
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