The second-largest U.S. mobile service provider AT&T Inc. (T) has made a good start to the year, with a mid-single digit growth in operating income and earnings.
Lower sales of Apple Inc.’s (AAPL) iPhone during the first quarter 2012 helped it to cut expenses that resulted in more profits but hurt subscriber growth to some extent. Further, the outperformance was attributable to the healthy wireless and wireline businesses.
First Quarter Review
AT&T’s first quarter adjusted earnings outpaced the Zacks Consensus Estimate and the year-ago earnings by 3 cents each. Revenue improved on continued 4G mobile broadband sales, strong wireless network performance and improved wireline revenue trends.
Wireless revenue advanced on the back of robust smartphone and branded computing device sales as well as lower post-paid churn. Rapid adoption of smartphones including Google Inc.’s (GOOG) Androids along with growth in tablets and connected devices such as automobile monitoring systems and security systems led to the growth in retail wireless subscribers.
Despite the solid momentum for AT&T U-verse and strategic services, Wireline revenue dipped on weakness in voice and legacy data products.
(Read our full coverage on this earnings report: AT&T Outshines on iPhones)
AT&T expects earnings per share to increase in the mid single-digit range, leading to further acceleration in the years ahead.
Agreement of Analysts
Estimates reflect a positive bias for both the second quarter and fiscal 2012 over the last 7 and 30 days. For the second quarter, 13 analysts out of 25 made upward revisions while 5 moved in the opposite direction in the last 30 days. For fiscal 2012, out of the 31 covering analysts, 23 revised their estimates upward while 1 revised it negatively over the last 30 days.
Only one analyst moved in the positive territory over the last 7 days and none made a downward move for both the second quarter and fiscal 2012.
For fiscal 2013, 15 analysts out of 28 revised their estimates upwards over the last 30 days and none moved in the same direction over the last 7 days. However, 6 and 1 analysts made downward revisions in the last 30 and 7 days, respectively.
The bullish analysts see 2012 as a strong year with continued growth in revenue, earnings per share and free cash flow as well as margin expansion. Continued strength in smartphone and branded computing device sales as well as rapid expansion of Long Term Evolution (:LTE) networks are fueling growth in the wireless business. AT&T is riding high on iPhones, Google Inc.’s (GOOG) Androids as well as LTE handsets, which are driving smartphone sales and have also led to subscriber accretion and reduced churn.
With respect to the wireline segment, the analysts expect positive business trends to continue going forward on the back of strong U-verse and business revenue, more specifically improving strategic services. This will aid wireline revenue to return to its growth curve and assure stable margins.
In a saturated wireless market, AT&T is looking at new avenues for growth such as home security and automation. The company is also shedding some of its slower-growing assets or restructuring underperforming or non-strategic assets such as the directory business and rural access lines. Yesterday, AT&T sold its 53% stake in its Yellow Pages business to Cerberus Capital Management LP for $950 million.
Going forward, AT&T will continue to focus on its core wireless, IP, cloud and application-based services. The company is expanding in faster-growing markets such as mobile data and broadband through LTE, U-verse IPTV and advanced television offerings.
Nevertheless, some analysts are skeptical about the company’s ability to manage the rising mobile data traffic amid stiff competition and limited wireless spectrum licenses. In addition, AT&T is facing a potential setback in its wireline division in the East, Midwest, West and legacy should it fail to negotiate the new labor contract with them, which might negatively hurt the company’s revenue and margins.
Magnitude — Consensus Estimate Trend
The magnitude of revisions for the second quarter remained stable over the last 7 days at 63 cents, but increased from 62 cents over the last 30 days.
The Zacks Consensus Estimate for 2012 is $2.37, unchanged over the last 7 days but 4 cents higher in the last 30 days. Similarly, the Zacks Consensus Estimate for 2013 is stable at $2.54 over the last 7 days but 3 cents higher in the last 30 days.
With respect to earnings surprises, the company’s fairly good track record is expected to continue in the coming quarters. AT&T produced a positive average earnings surprise of 1.54% over the last four quarters, indicating that it outpaced the Zacks Consensus Estimate by that amount over the last year.
In the recently concluded quarter, the company surprised us by reporting earnings 5.26% higher than what we had expected.
We expect AT&T’s growth prospects to be strong driven by subscriber accretion, higher smartphone adoption, LTE mobile broadband network, iPhone sales, U-verse expansion and cloud computing business. Further, a healthy balance sheet and strong commitment to shareholders’ return make the stock more attractive for income-oriented investors.
However, persistent access line losses, competitive pressures from rivals Verizon Communications Inc. (VZ) and Sprint Nextel Corp. (S), and heavy iPhone subsidies might drag near-term margins and earnings.
We are currently maintaining our long-term Neutral recommendation on AT&T. The stock retains a Zacks #3 (Hold) Rank for the short term (1-3 months).Read the Full Research Report on T
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