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Can Communications Segment Drive AT&T's (T) Q2 Earnings?

Zacks Equity Research

AT&T Inc. T is slated to report second-quarter 2019 results before the opening bell on Jul 24. The company is likely to record higher operating income from the Communications segment that generates the lion’s share of total revenues.

Let’s see how things are shaping up for the upcoming announcement.

Margin Improvement

The Communications segment includes three separate business units namely, Mobility, Entertainment Group and Business Wireline. Mobility provides wireless service to consumer and wholesale subscribers throughout the United States and its territories. The Entertainment Group provides video, high-speed Internet and communications services predominantly to residential customers in the United States. Business Wireline provides communications services to more than 3 million business customers, including multinational corporations and government and wholesale customers.

During the second quarter, AT&T introduced mobile 5G services in certain areas of seven U.S. cities — Austin, Los Angeles, Nashville, Orlando, San Diego, San Francisco and San Jose. With this, the company has deployed mobile 5G services in 19 cities across the country. In partnership with key technology suppliers, AT&T has made the world's first wireless 5G data transfer over millimeter wave using standards-based, production equipment with a mobile form factor device. Further, the company’s 5G Evolution technology is now live in more than 200 markets. This is likely to improve wireless revenues in the Mobility business division.

The company has continued steady investments across the country to enhance coverage, speed and performance for residents and businesses. It has also improved critical services that support Public Safety and first responders using the FirstNet communications platform. During second-quarter 2019, AT&T began offering the Samsung Galaxy S10 5G for its Business customers and 5G developers via AT&T Developer Program. This is likely to spur ongoing developments in the field of next-generation mobile communication. The fifth-generation cellular wireless technology will offer new connected experiences to subscribers as faster speed and lower latency remain core tenets. This will also drive the next industrial revolution through unparalleled mobile capabilities.

Following the completion of the latest round of telecom spectrum auction by the Federal Communications Commission – FCC Auction 102 – AT&T has emerged as the leading bidder among all participants. The company has reportedly won spectrum licenses that cover about 98% of the U.S. population, offering it a competitive advantage for seamless 5G deployment across the country. This is likely to be reflected in the upcoming results. (Read more: Will Healthy Top-Line Growth Buoy AT&T Q2 Earnings?)

Buoyed by such tailwinds, operating income from Mobility, Entertainment Group and Business Wireline is expected to be $5,624 million, $1,330 million and $1,357 million, respectively, compared with $5,351 million, $1,478 million and $1,223 million reported in the previous quarter. EBITDA from Mobility and Entertainment Group is expected to be $7,722 million and $2,684 million respectively, compared with $6,784 million and $2,798 million reported in the year-earlier quarter. The same from Business Wireline is expected to be $2,492 million, up from $2,458 million recorded in the previous quarter.

Earnings Whispers

Our proven model does not conclusively show that AT&T will beat earnings this quarter as it does not possess the key components. A stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. This is not the case here as you will see below:

Earnings ESP: Earnings ESP, which represents the difference between the Most Accurate Estimate and the Zacks Consensus Estimate, is -2.76%, with the former pegged at 87 cents and the latter at 89 cents. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

AT&T Inc. Price, Consensus and EPS Surprise

 

AT&T Inc. Price, Consensus and EPS Surprise

AT&T Inc. price-consensus-eps-surprise-chart | AT&T Inc. Quote

Zacks Rank: AT&T has a Zacks Rank #3. Although this increases the predictive power of ESP, we need to have a positive ESP to makes us reasonably confident of an earnings beat.

Note that we caution against stocks with a Zacks Rank #4 or 5 (Sell-rated) going into the earnings announcement, especially when the company is seeing a negative estimate revisions momentum.

Stocks to Consider

Here are some companies that you may want to consider, as our model shows that these have the right combination of elements to post an earnings beat this quarter:

Verizon Communications Inc. VZ is slated to release quarterly numbers on Aug 1. It has an Earnings ESP of +0.43% and a Zacks Rank #3. You can see the complete list of today’s Zacks #1 Rank stocks here.

NETGEAR Inc. NTGR is scheduled to release results on Jul 24. The company has an Earnings ESP of +1.01% and has a Zacks Rank #3.

The Earnings ESP for Ciena Corporation CIEN is +5.26% and it has a Zacks Rank of 2. The company is set to report quarterly numbers on Aug 29.

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