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What Went Wrong with AT&T’s Q2 Earnings?

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On July 24 as of 7:44 AM ET, AT&T (T) stock was down 1.8% at $31.51. The leading US mobile carrier reported its second-quarter earnings results in the premarket session. While the company managed to meet Wall Street’s earnings expectations, its revenue beat expectations.

On a YTD (year-to-date) basis on July 23, AT&T stock was up 12.4% compared to its telecommunications peers Sprint (S) and T-Mobile (TMUS), which were up 21.8% and 22.8%, respectively, YTD.

AT&T’s earnings and revenue

AT&T’s total revenue rose 15.3% YoY (year-over-year) to $45.0 billion in the second quarter, beating analysts’ estimate of $44.9 billion. In the second quarter of 2018, AT&T reported revenue of $39.0 billion. In the first quarter of 2019, it reported revenue of $44.8 billion.

AT&T posted adjusted EPS of $0.89 in the second quarter, down 2.2% YoY and in line with analysts’ estimate of $0.89. Analysts expect the company’s sales and adjusted EPS to be $183.0 billion and $3.56, respectively, in 2019.

In the second quarter, AT&T gained 3.9 million net wireless customers in the US. The feat could be significant given that smaller competitors Sprint and T-Mobile are making much of their ability to attract subscribers from other mobile operators. AT&T also gained 72,000 postpaid phone net customers in the second quarter.

AT&T’s video losses

AT&T disappointed investors with a loss of 778,000 Premium TV customers, more than its net loss of 544,000 in the first quarter. Premium TV consists of DIRECTV satellite and U-verse TV subscribers. The company also lost net 168,000 DIRECTV NOW customers.

AT&T currently faces a blackout of the CBS and Nexstar channels on its DIRECTV, DIRECTV NOW, and U-verse TV service. The company failed to renew its carriage programming contract with station owners amid disputes about higher fees.

Forward PE multiple

AT&T’s forward PE multiple is 8.92x. Analysts expect its adjusted EPS to rise 1.1% this year and 2.0% in 2020. They expect its earnings to rise 2.04% compounded annually in the next five years. This estimate suggests that the stock is grossly overvalued and has significant downside potential.

AT&T’s estimated five-year PEG (PE-to-growth) ratio is 4.42x. A PEG ratio of higher than 1 suggests that a stock is overvalued.

Analysts’ recommendations

Most analysts maintain “buys” on AT&T stock. Among the 28 analysts that follow the stock, 14 give it “buy” ratings, 12 give it “hold” ratings, and two give it “sell” ratings. On average, analysts have given the stock a 12-month target price of $34.00, which implies a rise of 6.0% from its closing price of $32.09 on July 23.

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