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3 Things to Watch In Tuesday’s AT&T Earnings Report

James Brumley

This year hasn’t been a great one for AT&T (NYSE:T) shareholders. T stock is down 19% since the end of December, as investors grapple with the impact of rising interest rates on dividend stocks, the uncertainty regarding the union of Time Warner and AT&T, and the fact that most of its key markets are not only quite competitive, but they’re highly saturated.

Still, at a trailing price-earnings ratio of a little more than 6 and a forward-looking P/E of just a little more than 8, it’s difficult to argue the doubters haven’t overshot.

A reversal of fortune for struggling AT&T shares may be right around the corner. The company will report second-quarter results on Tuesday after the closing bell rings. Here’s what investors can expect, and what they need to watch closely.

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AT&T Earnings Preview

Currently, analysts expect the telecom giant to post a profit of 85 cents per share on revenue of $39.39 billion.

That bottom line would be better than the year-ago figure of 79 cents per share, though that sales outlook would be 1% lower than 2017’s second-quarter top line of $39.84 billion.

The company has missed earnings estimates in two of its past three quarters, though it shouldn’t be overlooked that despite stagnant — even waning — revenue, net income has continued to edge a little higher, while per-share profits have improved at a slightly faster pace, thanks to modest stock buybacks.

3 Things to Watch

The overall numbers matter, but the underpinnings for those numbers may matter more right now to current and would-be AT&T shareholders. They’ll be looking at three particular metrics more so than any others:

1. Pay-TV Subscribers

The overarching reason AT&T is seeking to acquire Time Warner (and hoping the DOJ’s appeal doesn’t bar it) is to rekindle its deteriorating television business.

DirecTV NOW has proven to be a solid success, at least by subscriber count figures. The platform added 312,000 new members during the first quarter. But it lost a chunk of traditional cable subscribers in the process, leading to net growth of only 125,000 television viewers under AT&T’s Entertainment umbrella.

DirecTV NOW members are also less valuable to AT&T. The division’s Q1 revenue of $11.8 billion, even using the more advantageous “old” accounting method, was down from the Q1-2017 figure of $12.6 billion. EBITDA for the entertainment arm fell from $3.0 billion to $2.6 billion during Q1 as well.

The company needs some help here, although it’s not clear it will get it until/unless it’s allowed to team up with Time Warner.

2. Capital Expenditures

AT&T has been, and remains, on the cutting edge of the telecom industry’s underlying technologies, like leading the race in 5G and building a network that brings fiberoptic connectivity to more peoples’ homes.

Those haven’t been cheap efforts, though. In fact, they’re getting more expensive — and will continue to do so. The company has budgeted $25 billion for capital expenditures this year, versus only $21.6 billion last year.

It matters, simply because those expenditures sap an already waning operational cash flow. The first quarter’s $6.1 billion in capital spending shaved $8.9 billion worth of operating cash flow down to only $2.8 billion in free cash flow, which was the lowest FCF figure in over a year.

3. Wireless Subscribers

AT&T reports Business Solutions and Consumer Mobility results separately, but also together under the AT&T Mobility umbrella. It’s the latter, aggregate look that will tell you the most about the wireless carrier’s results.

To that end, while the company struggled with subscriber growth and high churn rates a couple of years ago, it’s found new ways to attract business and keep them on board. On the other hand, it’s had to lower prices to do so.

The specifics: Last quarter’s average revenue per user was a multi-quarter low of $57.01, on an apples-to-apples basis, or only $53.07 according to new accounting rules. Still, the 2.6 million new wireless subscribers it garnered during the first quarter was enough to push wireless revenue up 1.5%, while postpaid churn of 0.84% was a record first quarter low.

The company will need to report similar numbers on Tuesday if it wants to remain in investors’ good graces.

Bottom Line on T Stock

Tuesday is an opportunity for AT&T to prove to the world that the 28% beat-down since the middle of 2016 was illogical. But even if the company manages to prove it, if traders don’t want to see or believe it, a bounce from T stock isn’t guaranteed. Perception is a powerful force.

Perhaps more than anything else right now, it’s the Time Warner uncertainty keeping the bulls on the sidelines. Though the value is more than there, investors have convinced themselves that adding the movie and television studio to the mix is the only way AT&T will reinvigorate itself.

The good news is, most appeals are unsuccessful; the DOJ won’t likely prevent Time Warner from teaming up. The bad news is, it’s going to take a few more quarters for that to matter. Even a great Q2 earnings report won’t necessarily get AT&T shares back on a bullish track.

As of this writing, James Brumley held a long position in AT&T. You can follow him on Twitter, at @jbrumley.

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