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What’s Expected for AT&T’s Third-Quarter Earnings

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Oct. 15 2019, Updated 1:37 p.m. ET

Telecommunications giant AT&T (T) is set to report its third-quarter results on October 28 before the market opens. Analysts expect its EPS to rise YoY (year-over-year) to $0.93 from $0.90. AT&T has met or exceeded Wall Street’s EPS expectations in seven of the last ten quarters.

Investors are eagerly awaiting management’s commentary to gain a clearer outlook on the company. Activist investor Elliott Management has been pushing for operational changes such as divesting non-core assets to unlock value. When Elliott disclosed its $3.2 billion stake in AT&T last month, the telecom stock rose to a new 52-week high of $38.80. However, it has been range bound since then. It will be interesting to see how AT&T’s Q3 results affect its stock.

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Expectations for AT&T’s third-quarter results

In the third quarter, analysts expect AT&T’s total revenue to fall 1.4% YoY to $45.0 billion due to subscriber losses. This slowdown could concern investors, as AT&T’s top line has grown robustly over the last four quarters, averaging above 15% growth. Its total revenue was $44.9 billion in the second quarter.

In an investor update last month, AT&T predicted weak wireless equipment revenue in the third quarter. It foresees $400 million lower revenue for WarnerMedia because of the many Warner Bros. hit movies released in last year’s second half.

WarnerMedia contributed almost 19% of the company’s revenue in this year’s second quarter. At&T also plans to launch HBO Max next spring. The $274.0 billion conglomerate is trying to strengthen in the media segment to offset the saturated telecom market’s limited growth opportunities. In fiscal 2019, analysts expect AT&T to report $26.2 billion in total net income and $182.3 billion in revenue.

Peer T-Mobile (TMUS) is set to report its third-quarter results on October 31. Although T-Mobile is much smaller than AT&T, it is the fastest-growing US wireless company. In the third quarter, analysts expect its EPS to rise just 2% YoY to $0.95.

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Debt and free cash flow

One major consideration for investors is AT&T’s debt. At the end of the second quarter, the company’s net debt was $162.0 billion. The company’s debt has risen substantially in the last few years due to acquisitions such as DIRECTV and Time Warner.

On October 9, AT&T announced it was selling its telecom operations in Puerto Rico and the US Virgin Islands to Liberty Latin America (LILA). The wireless operations comprise 1.1 million subscribers and spectrum, real estate, and leases. The sale is set to complete in the next few quarters and fetch $1.95 billion in cash. The company plans to use the sale proceeds for debt repayments. So far this year, AT&T has announced or completed more than $11.0 billion in asset sales.

At the end of the second quarter, AT&T’s net debt-to-EBITDA ratio was close to 2.8x, higher than the company’s targeted 2.5x. The ratio shows how many years a company would take to repay its debt while keeping its debt and EBITDA constant. AT&T’s leverage ratio at the end of 2018 was close to 3.2x.

In its last quarterly release, AT&T increased its 2019 free cash flow guidance to $28.0 billion. Free cash flow, the difference between cash from operations and capital expenses, is commonly used for dividends, expansion, and debt repayments. AT&T’s huge free cash flow makes its dividends reliable. To learn more, read AT&T Declares a Quarterly Dividend: What to Know.

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How AT&T stock is placed

AT&T stock is currently trading at 10.4 times analysts’ earnings estimate for the next year, and at a notable discount to its five-year historical average multiple of 17x. AT&T stock also looks inexpensive compared with the S&P 500 (SPY). This year, AT&T and the S&P 500 have risen about 30% and 18%, respectively. The stock looks attractive despite analysts expecting its EPS to grow minimally in 2019 and 2020.

Elliott Management, which described AT&T stock as “deeply undervalued” when it disclosed its stake last month, foresees the stock reaching close to $60 by the end of 2021 if its restructuring plan is followed.

This year, T-Mobile stock has rallied more than 23% and is trading at 17 times analysts’ forward earnings estimate. The stock looks expensive compared with AT&T. Uncertainty surrounding the third-biggest telecom company’s merger with Sprint (S) has weighed on its stock.

AT&T stock is currently trading at $37.50, around 5% and 15% above its 50- and 200-day simple moving averages. The premiums indicate strength in the stock. Its relative strength index score was 53 yesterday, implying the stock was neither overbought nor oversold. Analysts’ mean price target of $36.50 for the stock implies a 2.5% downside in the next year. Of the 28 analysts covering the stock, eight suggest “buy,” six suggest “strong buy,” 13 suggest “hold,” and one suggests “sell.”

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