The second-largest U.S. mobile service provider
) has made a good start to the year, with a mid-single digit growth
in operating income and earnings.
Lower sales of
) iPhone during the first quarter 2012 helped it to cut expenses
that resulted in more profits but hurt subscriber growth to some
extent. Further, the outperformance was attributable to the healthy
wireless and wireline businesses.
First Quarter Review
AT&T's first quarter adjusted earnings outpaced the Zacks
Consensus Estimate and the year-ago earnings by 3 cents each.
Revenue improved on continued 4G mobile broadband sales, strong
wireless network performance and improved wireline revenue
Wireless revenue advanced on the back of robust smartphone and
branded computing device sales as well as lower post-paid churn.
Rapid adoption of smartphones including
) Androids along with growth in tablets and connected devices such
as automobile monitoring systems and security systems led to the
growth in retail wireless subscribers.
Despite the solid momentum for AT&T U-verse and strategic
services, Wireline revenue dipped on weakness in voice and legacy
(Read our full coverage on this earnings report:
AT&T Outshines on iPhones
AT&T expects earnings per share to increase in the mid
single-digit range, leading to further acceleration in the years
Agreement of Analysts
Estimates reflect a positive bias for both the second quarter
and fiscal 2012 over the last 7 and 30 days. For the second
quarter, 13 analysts out of 25 made upward revisions while 5 moved
in the opposite direction in the last 30 days. For fiscal 2012, out
of the 31 covering analysts, 23 revised their estimates upward
while 1 revised it negatively over the last 30 days.
Only one analyst moved in the positive territory over the last 7
days and none made a downward move for both the second quarter and
For fiscal 2013, 15 analysts out of 28 revised their estimates
upwards over the last 30 days and none moved in the same direction
over the last 7 days. However, 6 and 1 analysts made downward
revisions in the last 30 and 7 days, respectively.
The bullish analysts see 2012 as a strong year with continued
growth in revenue, earnings per share and free cash flow as well as
margin expansion. Continued strength in smartphone and branded
computing device sales as well as rapid expansion of Long Term
Evolution (LTE) networks are fueling growth in the wireless
business. AT&T is riding high on iPhones,
) Androids as well as LTE handsets, which are driving smartphone
sales and have also led to subscriber accretion and reduced
With respect to the wireline segment, the analysts expect
positive business trends to continue going forward on the back of
strong U-verse and business revenue, more specifically improving
strategic services. This will aid wireline revenue to return to its
growth curve and assure stable margins.
In a saturated wireless market, AT&T is looking at new
avenues for growth such as home security and automation. The
company is also shedding some of its slower-growing assets or
restructuring underperforming or non-strategic assets such as the
directory business and rural access lines. Yesterday, AT&T sold
its 53% stake in its Yellow Pages business to Cerberus Capital
Management LP for $950 million.
Going forward, AT&T will continue to focus on its core
wireless, IP, cloud and application-based services. The company is
expanding in faster-growing markets such as mobile data and
broadband through LTE, U-verse IPTV and advanced television
Nevertheless, some analysts are skeptical about the company's
ability to manage the rising mobile data traffic amid stiff
competition and limited wireless spectrum licenses. In addition,
AT&T is facing a potential setback in its wireline division in
the East, Midwest, West and legacy should it fail to negotiate the
new labor contract with them, which might negatively hurt the
company's revenue and margins.
Magnitude - Consensus Estimate Trend
The magnitude of revisions for the second quarter remained
stable over the last 7 days at 63 cents, but increased from 62
cents over the last 30 days.
The Zacks Consensus Estimate for 2012 is $2.37, unchanged over
the last 7 days but 4 cents higher in the last 30 days. Similarly,
the Zacks Consensus Estimate for 2013 is stable at $2.54 over the
last 7 days but 3 cents higher in the last 30 days.
With respect to earnings surprises, the company's fairly good
track record is expected to continue in the coming quarters.
AT&T produced a positive average earnings surprise of 1.54%
over the last four quarters, indicating that it outpaced the Zacks
Consensus Estimate by that amount over the last year.
In the recently concluded quarter, the company surprised us by
reporting earnings 5.26% higher than what we had expected.
We expect AT&T's growth prospects to be strong driven by
subscriber accretion, higher smartphone adoption, LTE mobile
broadband network, iPhone sales, U-verse expansion and cloud
computing business. Further, a healthy balance sheet and strong
commitment to shareholders' return make the stock more attractive
for income-oriented investors.
However, persistent access line losses, competitive pressures
Verizon Communications Inc.
Sprint Nextel Corp.
), and heavy iPhone subsidies might drag near-term margins and
We are currently maintaining our long-term Neutral
recommendation on AT&T. The stock retains a Zacks #3 (Hold)
Rank for the short term (1-3 months).
APPLE INC (AAPL): Free Stock Analysis Report
GOOGLE INC-CL A (GOOG): Free Stock Analysis
SPRINT NEXTEL (S): Free Stock Analysis Report
AT&T INC (T): Free Stock Analysis Report
VERIZON COMM (VZ): Free Stock Analysis Report
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