We maintained our Neutral recommendation on AT&T (T) following appraisal of third quarter results. AT&T enjoys strong position in the telecom sector, has lucrative alliances with other major companies and is enjoying positive business trends. However, these will likely be offset by persistent access line losses and aggressive pricing plans by rivals.
Headquartered in Dallas, Texas, AT&T stands as the second largest provider of wireless services in North America after Verizon Communications Inc. (VZ). AT&T offers a wide range of communication and business solutions that include wireless, local exchange, long-distance, data/broadband and Internet, video, managed networking, wholesale and cloud-based services.
AT&T reported mixed third-quarter performance. While earnings per share moved ahead of the Zacks Consensus Estimate, revenue fell short of our expectation.
For the coming months, we expect the company to display strong momentum in both wireline and wireless businesses. While continued strength in smartphone and branded computing device sales are fueling growth in wireless business, the wireline segment is well positioned backed by its U-verse and strategic services.
AT&T offers the best Internet speeds in the industry as it is the only U.S. carrier that provides 4G networks through both Long Term Evolution (:LTE) and High-Speed Packet Access Plus (HSPA+) technologies. The company has also started selling Apple Inc’.s (AAPL) new iPad Mini to its customers at a reduced price.
Additionally, AT&T maintains a solid balance sheet in the telecom industry with net debt-to-adjusted EBITDA ratio of 1.42 times at the end of the third quarter. The company delivers substantial returns to its shareholders through attractive dividends and share repurchases. We believe that the higher dividend along with the increased share repurchase program reflects the company’s confidence in its ability to generate strong cash flows.
Despite these positives, we prefer to remain on the sidelines as the saturated wireless market along with an imbalance of supply-demand fundamentals and cut-throat competitive scenario will keep the stock under pressure.
AT&T’s wireline division is also struggling with persistent losses in access lines with a glut of voice-over-Internet protocol (VoIP) service providers and aggressive triple-play (voice, data, video) offerings by the cable companies.
Moreover, the company’s domestic operations are subject to regulations by the Federal Communications Commission (:FCC) and other federal, state and local agencies. These regulatory regimes frequently restrict the company from providing certain products or services in designated areas, thus affecting the overall sales figure.
Hence, considering these factors, we believe that there is little room for further upside and expect the stock to trade in line with other group members.
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