AT&T, Inc. (T) is slated to report its second-quarter 2014 financial results on Jul 23, after the market closes. In the last reported quarter, the company had delivered a 1.43% earnings surprise. Let’s see how things are shaping up prior to this announcement.
Factors at Play This Quarter
Management has revised its guidance for full year 2014. The company expects revenue growth of 4% or higher with stable margin improvement. Adjusted earnings per share growth is estimated in the mid-single digit range. We believe significant contribution from the company’s wireless services led to the optimistic outlook.
AT&T’s wireless business, the post-paid segment in particular, is benefiting from promotional strategies undertaken by the company. The pre-paid market is also flourishing as evidenced by strong customer additions.
In addition, AT&T remains focused on its project VIP initiative, which targets business expansion. These initiatives target 4G LTE expansion, spectrum and network capabilities enhancement, 8.5 million new U-verse service customers and the addition of 57 million broadband users, thus covering 75% of the company’s Wireline footprint by the end of 2015.
Further, AT&T is also seeking to expand its fiber network to include 1 million additional customer locations by 2015. This project underlines the company’s efforts to meet the growing demand for high-speed Internet. We believe that this investment program will provide AT&T with a high-potential growth platform for revenues and earnings.
Going forward, the company is also planning to buy DIRECTV for $48.5 billion. The planned acquisition will promote AT&T in the domestic pay-TV business to the second-largest position. Moreover, the DIRECTV takeover will increase AT&T’s video customer base by 20.3 million from its current base of 5.7 million customers. This will potentially take the latter’s pay-TV customer count to 26 million.
However, the company’s wireline division is struggling with persistent losses in access lines as a result of competitive pressure from voice-over-Internet protocol (VoIP) service providers and aggressive triple-play (voice, data, video) offerings by the cable companies.
Further, AT&T remains challenged by aggressive pricing plans by direct competitors for iPhones and smartphones. Smaller wireless carriers also offer cost effective voice and data plans. This may negatively influence AT&T’s high-end handset sales and challenge subscriber retention.
Our proven model does not conclusively show that AT&Tis likely to beat earnings this quarter.This is because 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. Unfortunately, that is not the case here as elaborated below.
Negative Zacks ESP: Earnings ESP which represents the difference between the Most Accurate estimate and the Zacks Consensus Estimate, stands at -1.59% for AT&T.
Zacks Rank: AT&T carries a Zacks Rank #4 (Sell), which further add to the pessimism surrounding the stock.
We caution against stocks with Zacks Ranks #4 and 5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revision momentum.
Other Stocks to Consider
Here are some companies to consider as our model shows that these have the right combination of elements to post an earnings beat this quarter:
Shenandoah Telecommunications Co. (SHEN) with earnings ESP of +2.50% and a Zacks Rank #1.
TELUS Corp. (TU) with earnings ESP of +1.85% and a Zacks Rank #2.
BCE Inc. (BCE) with earnings ESP of +1.27% and a Zacks Rank #2.