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Dow 30 Earnings: AT&T - Third Quarter 2011
AT&T (T – Free AT&T Stock Report), the second-largest wireless carrier in the United States behind rival Verizon (VZ – Free Verizon Stock Report), has reported roughly in-line results for the September quarter, leaving the price of this high-quality Dow-30 component little changed in the aftermath of the report. Revenues were slightly lighter than we had anticipated during the period, as pay-TV customer growth appeared to cool off a bit against a chilly macroeconomic backdrop, and as wireless activation activity slowed moderately ahead of Apple's (AAPL) launch of its next-generation iPhone 4S. (AT&T added 319,000 high-margined postpaid wireless subscribers, down from 331,000 during the June interim.) But share net of $0.61 matched our estimate and Wall Street's consensus view, thanks to lower equipment subsidies and strong cost controls across all business segments. Moreover, the near-term future for AT&T still looks pretty bright.
Key wireless subscriber additions ought to pick up in the fourth quarter, supported by iPhone 4S momentum (we are not overly concerned about the extra competition from Sprint Nextel (S)) and heightened demand for Android smartphones. (Sales of devices powered by Android, Google's (GOOG) mobile operating system, more than doubled in the September period.) Also, we see postpaid ARPU, or average revenue per user, rising as more customers switch from traditional cellular phones to feature-rich smartphones that necessitate higher fixed-rate data plans.
Meanwhile, we are optimistic regarding the legacy wireline operations, despite the heavy pressure on America's cash-strapped consumers. Indeed, we still envision U-verse, AT&T's new video service, being a solid growth engine for years to come, which should help the company to offset weakness in the access-line base. And the business solutions unit ought to be more than stable, buoyed by customers' healthy appetites for new IP (Internet Protocol) and cloud-based products.
This latest earnings report was somewhat overshadowed by AT&T's ongoing, and very public, battle to close its proposed $39 billion acquisition of T-Mobile USA, which is owned by Deutsche Telekom (DTEGY). Little was said by management about the controversial merger, however, which is being aggressively contested by the U.S. Justice Department. And even without T-Mobile USA, the fourth-largest domestic mobile operator, we have high hopes for AT&T's now-core wireless segment.
We continue to recommend these large-cap shares for defensive, income-oriented investors. Notably, too, in the wake of the third-quarter report, we are leaving our share-net estimates for 2011 and 2012 unchanged at $2.40 and $2.60, respectively.
About The Company: AT&T, formerly SBC Communications, is one of the world’s largest telecom holding companies and is the largest in the United States. Its traditional (SBC only) wireline subsidiaries provide services in 13 states, including California, Texas, Illinois, Michigan, Ohio, Missouri, Connecticut, Indiana, Wisconsin, Oklahoma, Kansas, Arkansas, and Nevada. The company also owns Cingular (now AT&T Wireless). It has made a number of acquisitions, including PacTel (April 1997), SNET (October 1998), Ameritech (October 1999), AT&T (November 2005), and BellSouth (December 2006). It operates a total number of consumer revenue connections of 45 million. In 2010, about 52% of its sales came from wireless, 23% from wireline voice operations, 22% were from the data segment, and the remainder from advertising.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.