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Verizon, AT&T Q1 Results On Tap As Consumer Scene Looks Bright

JJ Kinahan

Verizon Communications Inc. (NYSE: VZ) and AT&T Inc. (NYSE: T), wireless industry competitors with diverging business strategies, are among the first major companies in the newly formed Communication Services sector to report this quarter. Investors will see if their revenue gets an expected boost, perhaps from the improving consumer scene.

VZ and T are the two largest wireless carriers in the U.S. by subscribers, and both companies stocks struggled after their previous quarterly reports. VZ is scheduled to report its earnings before the opening bell Tuesday, April 23, and T reports before the bell on Wednesday, April 24.

The Communication Services sector was created just a few quarters ago, combining companies that were in Info Tech and Consumer Discretionary with those from the old Telecom sector.  With the mass amount of consumers in nearly nonstop contact with communications devices, companies here like VZ and T might consider the thriving consumer as a good sign for their bottom line. And a stronger than expected U.S. jobs report in March, which revealed the healthiest jobs scene in nearly 50 years, might help reassure investors about consumer confidence.

By some third-party analyst projections, the Communications Services sector is expected to lead all sectors in revenue growth this quarter, although the earnings expectations aren’t so rosy. Wall Street expectations for T, specifically, fit that bill, but the forecast for VZ is more muted.

Both companies shares had a positive start to the year, but in the second quarter that changed. Year to date, VZ shares were up 2.3% as of April 18, with momentum slowing the past month, while T shares were up 11.9% on a steady rally.

T is expected to report adjusted EPS of $0.86, up a smidge from $0.85 in the prior-year quarter, according to third-party consensus analyst estimates. Revenue is projected at $45.1 billion, up 18.6% from a year ago.

VZ is expected to report adjusted EPS of $1.17, on par with the prior-year quarter, according to third-party consensus analyst estimates. Revenue is projected at $32.2 billion, also about flat from a year ago.

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FIGURE 1: CHOPPY TELECOMS: Telecom companies, including Verizon (VZ - candlestick) and AT&T (T - purple line) have seen a good deal of up and down movement since last fall. Though some analysts expect healthy growth in the Communications Services sector as a whole, whether such growth might extend to these two companies remains to be seen. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results. 

Verizon Steps Up in Streaming Market

Recently, VZ started to roll out its 5G network in Chicago and Minneapolis, kicking off the era of super-speed, which could have an impact on nearly every corner of the Communications Services sector. Its planning to launch the 5G network in 30 major cities this year. For consumers who can tap into it, 5G can offer speeds of about 10 times faster than they might normally get, however CEO Hans Vestburg cautioned that the company will not likely see revenue from 5G upgrades until 2020.

The rollout is so far largely symbolic because most consumers don’t have the Motorola phone for the clip-on modem that will upgrade the service, nor is the infrastructure build out completed. However it offers potential for revenue growth for a number of companies in the communications sector besides VZ, including T.

Meanwhile, VZ has also been trying to find a sweet spot in pricing. It increased the in-store cost to upgrade or activate its phones to $40 from $30, citing the fact that consumers get a “full service experience” there. In tandem, the cost for upgrades made online, which would be cheaper for the company, have been reduced to $20 from $30 for the consumer.

Last quarter, VZ’s revenue missed Wall Street estimates and its quarterly profit was flat. Shares slid 3% in premarket trade. Still, VZ added nearly twice the number of new wireless subscribers that third-party analysts expected.

Verizon Options

For VZ, options traders have priced in a 2.8% ($1.62) stock move in either direction around the coming earnings release, according to the Market Maker Move™ indicator on the thinkorswim® platform.

Put options have been active at the weekly 59, 60, and 58 strikes, while call option activity has been heaviest at the 58 strikes. Implied volatility was at the 24th percentile as of this morning. 

Note: Call options represent the right, but not the obligation, to buy the underlying security at a predetermined price over a set period of time. Put options represent the right, but not the obligation, to sell the underlying security at a predetermined price over a set period of time.

AT&T Keeps Entertainment Focus

With the start of the next generation of internet connectivity led by VZ’s 5G rollout, T seems to be remain focused on entertainment endeavors. Remember, last year T acquired media giant Time Warner for $85 billion, which gave it a bank of content.

Now, competition in the media and entertainment market is heating up, especially in streaming, where T has said it wants to launch a more robust streaming service anchored by HBO at a “compelling price point” by the end of the year. That will have to contend with the influx of new streaming offering from major players like Walt Disney Co (NYSE: DIS) and Apple Inc. (NASDAQ: AAPL).

T’s debt load, which many analysts say is significantly high, is also likely to continue to be on investors’ radars again this quarter. It held $171 billion in debt at the end of last quarter, and investors will soon learn whether its efforts to pare back its debt are having any impact. T has said it will pay down up to $20 billion by the end of this year in part by selling non-core assets, which it expects will raise about $8 billion. The wireless giant just sold its minority stake in Hulu, valued at $1.43 billion, which its using toward debt reduction.

Last quarter, T saw slower wireless subscriber growth than expected with a net gain of 134,000 new subscribers, short of the 208,000 third-party analysts were expecting. The DirectTV Now streaming service lost 267,000 members, more than expected and which the company blamed in part on customers leaving after a promotional introductory period. Total revenue was short of third-party estimates, and earnings were in line. Its stock slid 4% in the aftermath of the report.

AT&T Options

For T, options traders have priced in a 3.3% ($1.06) stock move in either direction around the coming earnings release, according to the Market Maker Move indicator on the thinkorswim platform.

Put options have been active at the weekly 32, 32.5, and 33 strikes, while call option activity has been heaviest at the 30 and 32 strikes. Implied volatility was at the 23rd percentile as of this morning. 

Information from TDA is not intended to be investment advice or construed as a recommendation or endorsement of any particular investment or investment strategy, and is for illustrative purposes only. Be sure to understand all risks involved with each strategy, including commission costs, before attempting to place any trade.

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