Shares of AT&T T have surged 31% in 2019 to easily top its industry’s 8% average climb and the S&P 500’s 17% jump. The question is will the telecommunications powerhouse keep up its impressive run amid a changing consumer landscape that has seen more pay-TV customers defect in favor of streaming TV services such as Netflix NFLX.
AT&T’s Pitch & Problems
AT&T completed its $80 billion-plus acquisition of Time Warner (now called WarnerMedia) last summer in a move meant to bolster and broaden the telecom giant’s portfolio amid changing consumer habits. The Time Warner deal brought HBO, Turner, Warner Bros, and cable channels such as CNN under AT&T’s umbrella.
The company is projected to roll out its challenge to Netflix, Amazon AMZN Prime, Apple AAPL, Disney DIS, and others in the spring of 2020.HBO Max should help AT&T compete in a streaming TV era that is just starting to heat up.
The firm also said last quarter that it planned to begin trials of its new “thin client video service” channel package called AT&T TV during the third quarter.
Investors also want to see the firm adapt to other challenges. This includes activist investor Elliott Management’s early September push for AT&T management to move on from non-essential assets. AT&T executives had already started to divest, which included selling its stake in Hulu, in order to help pay for its WarnerMedia deal.
Last week, AT&T announced that it agreed to sell its Puerto Rican and U.S. Virgin Islands operations to Liberty Latin America Ltd. LILA for $1.95 billion in cash. The firm noted that the new deal brought its “completed or announced monetization efforts this year" to more than $11 billion. AT&T management also said that they expect the firm to return to repurchasing shares in the fourth quarter, along with further debt reduction.
AT&T’s plans to continue to pay down debt might also help ease nerves on Wall Street regarding its continued loss of TV users. Last quarter, the firm, which owns U-Verse cable and DirecTV, lost 778,000 “premium TV subscribers” and 168,000 “DirecTV NOW subscribers.”
Comcast CMCSA and other cable giants have also lost TV users. Luckily, AT&T’s wireless business continued to add customers as it competes against Verizon VZ.
Q3 Outlook & Earnings Trends
Moving on, our current Zacks Consensus Estimates call for AT&T’s Q3 revenue to slip 1.2% to $45.18 billion. The firm’s fourth-quarter sales are expected to fall at a similar rate, with full-year fiscal 2019 revenue still projected to surge 6.8% to $182.40 billion. Peeking a bit further down the road, the company’s 2020 sales are expected to pop 0.42% above our current-year estimate to come in at $183.16 billion.
At the bottom end of the income statement, T’s adjusted quarterly earnings are projected to climb 3.33% to reach $0.93 per share. AT&T’s Q4 EPS figure is then projected to pop 3.5% to help lift full-year earnings by 1.1%. The telecom firm’s adjusted FY20 earnings are expected to jump 2.4% higher than our 2019 estimate.
AT&T has a relatively solid history of quarterly earnings beats, but investors should note that the company’s earnings estimate revisions have trended more heavily in the wrong direction recently.
AT&T is Zacks Ranks #3 (Hold) at the moment that sports an “A” grade for Value in our Style Scores system. The stock is trading below its industry’s average and its own five-year median when it comes to forward 12-month Zacks earnings estimates.
The company also pays an annualized dividend of $2.04 per share. This helps T boast an impressive 5.43% yield, which comes in way above the 10-year U.S. Treasury note’s 1.73%.
AT&T’s solid valuation picture and strong dividend yield will likely keep most investors around no matter what happens when the firm reports its Q3 fiscal 2019 financial results on October 28. However, T stock rests just below its 52-week highs, which could put added pressure on the firm to post stronger-than-expected quarterly results.
In the end, though, Wall Street might focus more on AT&T’s streaming future and updates on what it plans to do with assets such as DirecTV.
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