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Dow-30 Earnings: AT&T Inc. - Second Quarter 2013
AT&T (T – Free AT&T Stock Report), the nation's largest telecommunications company and a Dow-30 component, has posted mixed second-quarter results that were basically in line with our estimates and Wall Street's expectations. There were some encouraging signs for investors, to be sure, though not enough, it seems, for the large-cap issue to shake off its laggard status. In fact, the stock pulled back modestly on the earnings news, and continues to underperform the broader Dow Jones and S&P 500 indices.
Revenues of $32.1 billion for the June interim were actually on the strong side, thanks to good showings from both the wireless and wireline businesses. The wireless unit benefited from better-than-anticipated postpaid net additions (of 551,000), with gains in tablets offsetting lackluster phone subscriber metrics. (Archrival Verizon (VZ – Free Verizon Stock Report) still looks to have the upper hand in the smartphone market.) And the traditional wireline division was buoyed by heightened penetration of U-verse, AT&T's popular broadband, video, and IP telephone service. This made up for further enterprise weakness, though business spending finally seems to be picking up against a gradually improving macroeconomic backdrop.
Margins were the biggest concern during the period, and are probably what's been holding the stock back of late. Indeed, wireless subscriber growth continues to come at a high cost, as the company must pay hefty OEM subsidies for each new wireless customer it adds. This is the primary reason why second-quarter share net of $0.67 missed our estimate by a penny. Still, there are other factors keeping profit growth in check, including an uptick in investment activity that is needed to shore up the carrier's historically spotty wireless network. In particular, AT&T continues to pour a lot of money into its multiyear Project Velocity IP plan, a $14 billion project that aims to expand 4G LTE coverage, broaden the U-verse platform, and deploy fiber to an additional one million business customers.
Given the in-line results, we are leaving our share-net calls for 2013 and 2014 at $2.50 and $2.70, respectively. The company will probably continue to deal with margin headwinds and questions about when its new investments will pay off. But its long-term outlook is decent, in our view, especially considering the ongoing surge in data usage that will likely bolster its results for years to come. AT&T stock, which also features a dividend yield in the neighborhood of 5%, would make a fine addition, we think, to most diversified portfolios.
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 39.3 million. In 2012, about 56% of its sales came from wireless, 18% from wireline voice operations, 25% 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.