Lately, the US wireless industry has seen nationwide consolidation. This industry is intensely competitive, and performance is largely dependent on network superiority, service quality, and scalability. Cutthroat price competition puts pressure on telecommunications companies’ margins.
Telecommunications giant AT&T has seen its stock surge 37.5% since the beginning of 2019. Meanwhile, the stock of its closest rival, telecommunications giant T-Mobile, has risen 21.4% year-to-date as of December 27. The benchmark S&P 500 Index was up 29.3% year-to-date as of December 27. The Dow Jones Industrial Average rose 22.8%, while the Nasdaq Composite Index climbed 35.7%.
While competing with each other, both telecommunications companies have also been facing increased competition from top cable companies who are providing mobile services. Comcast (CMCSA) and Charter Communications (CHTR) are offering wireless services with the help of their mobile virtual network operator agreement with Verizon. Dish Network (DISH) is also planning to offer wireless services. Read Investors Keeping Their Fingers Crossed for Dish Wireless to learn more.
AT&T’s financial performance
AT&T reported adjusted EPS of $2.68 in the first nine months of 2019 compared to $2.67 during the same period in 2018, reflecting 0.4% YoY (year-over-year) growth. In the third quarter, the company reported adjusted EPS of $0.94 compared to $0.90 in the third quarter of 2018, reflecting 4.4% YoY growth.
AT&T reported revenue of $134.4 billion in the first nine months of 2019 compared to $122.8 billion during the same period in 2018, reflecting 9.5% YoY growth. In the third quarter, AT&T reported revenue of $44.6 billion, a YoY fall of 2.5% and a sequential fall of 0.8%. Its revenue also came in below the consensus estimate of $45.0 billion. Its third-quarter revenue decline was mainly the result of significant domestic pay-TV customer losses.
In the first nine months of 2019, AT&T gained 10.4 million net wireless subscribers in the US. The company gained 254,000 postpaid phone net customers in the first nine months of 2019 compared to 63,000 net additions in the first nine months of 2018. AT&T also added 669,000 prepaid net customers in the first nine months of 2019.
In the first nine months of 2019, AT&T reported a net loss of 2.49 million traditional pay-TV customers—more than 795,000 net losses in the first nine months of 2018. The company lost net 446,000 over-the-top customers in the first nine months of 2019 compared to net additions of 703,000 in the previous year’s period.
T-Mobile’s financial performance
T-Mobile reported diluted EPS of $3.15 in the first nine months of 2019 compared to $2.62 in the same period in 2018, reflecting 20.2% YoY growth. In the third quarter, the company reported diluted EPS of $1.01 compared to $0.93 in the third quarter of 2018, reflecting 8.6% YoY growth.
T-Mobile reported revenue of $33.1 billion in the first nine months of 2019 compared to $31.9 billion during the same period in 2018, reflecting 3.9% YoY growth. In the third quarter, T-Mobile reported revenue of $11.1 billion, implying YoY growth of 2.0% and sequential growth of 0.7%. Its revenue also came in below the consensus estimate of $11.3 billion. T-Mobile’s revenue was boosted by its wireless service revenue’s rise of 6.4% YoY to $8.6 billion in the third quarter. The company’s service revenue in the postpaid component increased by 9.6% YoY to $5.7 billion in the third quarter.
T-Mobile gained 2.12 million postpaid phone net customers in the first nine months of 2019 compared to 2.08 million net additions in the first nine months of 2018. The company also gained 262,000 prepaid net subscribers in the first nine months of 2019. It posted a postpaid phone churn rate of 0.85% compared to 1.02% in the first nine months of 2018.
2019 outlooks for AT&T and T-Mobile
For 2019, AT&T expects adjusted EPS growth in the low-single-digit range. The telecommunications company expects free cash flow and gross capex in the range of $26 billion–$23 billion, respectively. The carrier expects to pay down its huge debt and reduce its leverage to about 2.5x by the end of 2019. AT&T will likely monetize $14 billion worth of noncore assets in 2019.
Wall Street analysts expect AT&T to report adjusted EPS of $0.88 and $3.54, respectively, in the fourth quarter and 2019. Analysts also expect it to see fourth-quarter revenue of $47.0 billion, down 2% YoY. Analysts expect the company’s sales to rise 6.3% YoY in 2019.
T-Mobile has guided for 2019 postpaid net customer additions of 4.1 million–4.3 million. The telecommunications company expects adjusted EBITDA of $13.1 billion–$13.3 billion. For 2019, T-Mobile expects cash capex (excluding capitalized interest) of between $5.9 billion and $6.0 billion.
Wall Street analysts expect T-Mobile to report diluted EPS of $0.83 and $3.98, respectively, in the fourth quarter and 2019. Analysts also expect its fourth-quarter revenue to be $11.8 billion, up 3.4% YoY. Analysts expect its sales to rise 3.8% YoY in 2019.
Elliott Management’s stake in AT&T
In September, hedge fund Elliott Management revealed a $3.2 billion stake in AT&T and criticized its strategy. The activist investor suggested divesting noncore assets such as DIRECTV, eliminating $5 billion in net costs, reviewing how capital is allocated, and ceasing acquisitions. Elliott thinks AT&T stock will be worth $60+ per share by 2021 if the company follows its recommendations.
According to a CNBC report on September 9, the fund said, “We firmly believe that AT&T’s M&A [mergers and acquisitions] strategy has not only contributed directly to its profound share price underperformance, but has also caused distractions that have contributed to the Company’s recent operational underperformance.” It added, “AT&T has yet to articulate a clear strategic rationale for why AT&T needs to own Time Warner.”
To learn more about Elliott’s suggested changes, check out Should AT&T Be on Your Shopping List in September? and AT&T Stock: Jim Cramer’s Views, Wall Street’s Preference.
T-Mobile and Sprint merger
Last year in April, T-Mobile and Sprint (S) announced their merger plans. However, the merger deal is still pending, as more than a dozen state attorneys general have sued to stop the transaction. The attorneys general from about 13 states and the District of Columbia believe that the combination would reduce competition and lead to increased prices for consumers.
The US Department of Justice and the Federal Communications Commission have conditionally approved the merger deal. Antitrust regulators gave the deal their blessing after the proposed new T-Mobile agreed to sell Dish certain wireless assets.
To learn more about the T-Mobile and Sprint merger deal, read T-Mobile-Sprint Merger Antitrust Trial Ends Positively and Why T-Mobile Sprint Merger Odds Are Down to 55%.
5G Update: AT&T and T-Mobile
On December 27, AT&T launched a low-band 5G network service in six additional cities, according to The Verge. The new cities include New York City, Washington, DC, Baltimore, Las Vegas, Detroit, and Philadelphia. According to The Verge, “The six new cities put AT&T’s total number of 5G cities at 19 (and total 5G+ cities at 25), although the carrier only offers a single 5G phone to date: the $1,300 Galaxy Note 10 Plus 5G.”
Earlier this month, T-Mobile launched its 5G network service nationwide, using its low-band 600 MHz spectrum.
Analysts’ recommendations for AT&T and T-Mobile
A majority of analysts have bullish stances on T-Mobile stock. Currently, 17 out of 22 analysts (or 77%) rate T-Mobile stock as a “buy,” while the rest call it a “hold.” Meanwhile, 13 out of 30 analysts (or 42%) have “buy” recommendations on AT&T stock. About 15 analysts have “hold” recommendations, while two have “sells.”
Currently, analysts see more upside in T-Mobile stock over the next 12 months. The stock has a target price of $90.16 and a potential upside of 16.7% for the next 12 months. AT&T stock has an average target price of $39.02, with a potential downside of around 0.6% over the next 12 months.
Stock performance of AT&T and T-Mobile
T-Mobile stock fell 0.21% to close trading at $77.24 on December 27. The company was trading at a discount of 9.4% to its 52-week high of $85.22 and 23.8% higher than its 52-week low of $62.41.
Based on T-Mobile’s December 27 closing price, it was trading 0.8% above its 20-day moving average of $76.62, 1.9% below its 50-day moving average of $78.70, and 1.7% below its 100-day moving average of $78.58.
In comparison, AT&T rose 0.20% to close trading at $39.24 on December 27. The stock was 1.9%, 2.2%, and 4.8% above its 20-day, 50-day, and 100-day moving averages of $38.49, $38.41, and $37.44, respectively.
T-Mobile’s and AT&T’s 14-day RSI scores stood at 50 and 64, respectively, suggesting that both the stocks are neither “oversold” nor “overbought.”