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Pension Plan to Mar AT&T 4Q

Zacks Equity Research

Telecom biggie AT&T Inc. (T) is expected to incur a charge of $10 billion in the fourth quarter 2012, as a result of steeper pension issues. Further, hefty smartphone subsidies along with the after effects of super storm Sandy will also pull down the profit level.

The company stated that the retirement fund obligation is due to an actuarial loss of $12 billion. This will be partially negated by $1.9 billion coming from asset sale.

Another factor impacting the quarter’s results is the heavy subsidy that AT&T pays for each smartphone sale. As reported earlier, the company has set a new record with the sale of 10 million smartphones in the last quarter of 2012. Hence, the company is currently burdened with a weighty subsidy figure that will likely suppress the wireless profit margins.

Wireless carriers like AT&T have to shell out heavy subsidies to handset manufactures in order to offer mobile phones to customers at a discount under two-year contract plans. The company targets to sell around 25 million smartphones in 2013.

Apart from these operational hurdles, AT&T’s performance during the quarter was also ransacked by natural calamities, including Hurricane Sandy. This whirlwind that passed over America in late October damaged several cellphone towers, causing service failures across many territories. The company expects its operating profit to go down by nearly $175 million owing to this factor.

These aspects plus the unstable economic conditions of the nation and concerns over the securities markets in 2013 have compelled the second largest provider of wireless services in North America to lower its expectation for long-term rate of return.

San Antonio, Texas based AT&T will release its full fourth-quarter 2012 financial results on January 24, 2013 after the close of trading. The Zacks Consensus Estimates for the fourth quarter and 2012 earnings currently stand at 48 cents per share and $2.37 per share, respectively. The estimates reflect a respective year-over-year growth of 13.1% and 7.8% for the fourth quarter and 2012.

Last week, AT&T’s prime rival Verizon Communications Inc. (VZ) stated that it will witness charges as high as $10 billion. This involves post retirement benefit liabilities of $7 billion plus expenses related to other items including hurricane Sandy.

We maintain our long-term Neutral recommendation on AT&T, supported by a Zacks Rank #3 (Hold).

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