The second-largest U.S. mobile service provider AT&T Inc. (T) is slated to release its first quarter 2011 earnings on April 20 before market opens. The current Zacks Consensus Estimate for the first quarter is 57 cents, representing a decline of 1.31% from the year-ago level.
AT&T had average positive surprises of 5.38% in the last four quarters of 2010. We expect the first quarter to be a negative surprise as AT&T lost the exclusive hold on Apple Inc.’s (AAPL) iPhone that it enjoyed since June 2007. This February, Verizon Communication (VZ) started selling the iPhone, which is one of the strongest revenue generators of AT&T.
Last month, AT&T announced its intention to acquire Deutsche Telekom's unit, T-Mobile USA, for $ 39 billion. AT&T’s share price appreciated rapidly on the heels of the announcement and the stock was about to reach its peak level trading near its 52-week high. Thus, the news has already been absorbed by the market and we expect the stock to have little room for further appreciation from the current level.
In the fourth quarter conference call, AT&T had guided its fiscal 2011 earnings per share, excluding changes in capitalized interest, to grow in mid single digits with an expansion in consolidated, wireline and wireless operating margins.
Fourth Quarter Flashback
In the fourth quarter of 2010, AT&T’s adjusted earnings outpaced the Zacks Consensus Estimate by a penny and were well above the year-ago quarter. Strong earnings were driven by revenue growth, record wireless subscriber additions, robust U-verse services sales, and gains in IP-based and strategic business services revenues.
Wireless revenue improved on subscriber growth while wireline revenues fell on a steep decline in its traditional fixed-line phone business. Wireless subscribers grew 12.2% year over year to 95.5 million at the end of the fourth quarter. This represented an all-time high quarterly net addition of 2.8 million wireless subscribers in the company’s history.
AT&T’s U-verse TV subscribers reached 3 million, representing the best quarter of the year. However, total consumer connections plunged to 43.4 million from 45.3 million in the year-ago quarter.
Agreement of Analysts
Estimates for the first quarter have been trending downward over the last 7 and 30 days. Over the last 7 days, 4 analysts out of 25 have made downward revisions while one analyst moved in the opposite direction. Over the last 30 days, 7 analysts reduced their estimates while 2 made positive revisions.
For fiscal 2011, out of 30 analysts, 3 revised their estimates downward over the last 30 days while none moved in the same direction over the last 7 days. Only 3 analysts made positive revisions to their estimates over the last 30 days and 2 revised their estimates upward over the 7 days.
The analysts expect lower first quarter earnings due to the loss of iPhone subscribers to its largest rival, Verizon. AT&T activated 4.1 million iPhones in the last reported quarter. Despite the strong overall operating performance, the company remains challenged by the sharp fall in its traditional fixed-line phone business.
Additionally, although the AT&T/T-Mobile merger would lead to extensive growth in subscribers, revenues as well as profits, the transaction will take time and might alter the structure of the overall telecommunication industry. We believe the AT&T/T-Mobile merger would create a duopoly in U.S. wireless services. It would further alleviate competition making AT&T and Verizon the two dominant players in the industry, controlling almost 80% of the U.S. wireless post-paid market.
AT&T might have to pay a break-up fee of $ 3 billion in addition to some license fees to the German company, if the merger fails.
Magnitude—Consensus Estimate Trend
Over the last 7 days, the magnitude of the first quarter estimate revisions has fallen from 58 cents. For fiscal 2011, the Zacks Consensus Estimate remains static at $ 2.37.
Our Analysis
We believe the inclusion of T-Mobile operations will position AT&T as the market leader in the U.S. wireless industry and further bolster its mobile broadband services, which are currently booming. The transaction is expected to be earnings accretive in its third year and generate $ 3 billion of synergies per year.
Additionally, the company is expanding its wireless and wireline businesses, which would in turn fuel profitability going forward. We expect wireless revenue to continue growing with a low churn rate and network upgrades, and wireline revenue to improve on enhanced services in AT&T U-verse and solid cost management.
AT&T plans to roll out LTE-based 4G technology in mid 2011 offering a peak speed of 100 Mbps, and covering between 70 million and 75 million people by the end of 2011. All these factors will lead to the company’s solid growth over the long term. However, AT&T is lagging its peers in LTE services. Verizon launched its 4G services at the end of 2010 and Sprint Nextel Corp. (S) provides LTE services via Clearwire Corp.'s (CLWR) network.
We are currently maintaining our long-term Neutral rating with the Zacks # 3 (Hold) Rank.
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