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April 21, 2009

AT&T 1Q09 Earnings Preview

AT&T reports 1Q09 results before the open on Wednesday. Current consensus calls for EPS of 48 cents on revenues of $31.1 billion. EBITDA is expected to be about $10.1 billion.

Estimates have been pretty stable over the past 90 days after taking a big hit due to the economy and pension accounting. The stock has rebounded off its lows but has not been a huge gainer in the current rally. The setup for the stock going into the report is mixed. A solid quarter on financial and subscriber metrics and constructive guidance commentary could take the shares toward the low $30s. If the numbers are no good, a move back to the low $20s could occur.

The risk-reward tradeoff seems neutral to negative for short-term traders. AT&T has an awful lot going on which means that it will easy for shorts to pick apart the quarter. The most likely spots for negative numbers or spin will be wireless net subscriber additions, wireless voice ARPU, residential wireline access line losses, and enterprise revenues. The biggest risk, but something I do not expect, is a shortfall in wireless data ARPU and growth.

Upside would come from signs of stabilization in the residential wireline or enterprise businesses. These businesses will report negative growth – access lines will fall 12% and enterprise revenues may fall as much 4% -- with sequential deterioration. However, if 4Q to 1Q results deteriorate less slowly than expected, the "less bad" bullish trade will be on.

Positive results are expected in wireless margins with expansion by 120 basis points or more the consensus expectation. Margins will benefit from a lesser impact of iPhone subsidies and growing contribution of wireless data revenues. Growth in data ARPU should more than offset continued declines in wireless voice ARPU.

There also could be upside in the next generation U-Verse products with TV and broadband subs growing by several hundred thousand. DSL subs will likely fall again but overall broadband results should represent a second consecutive quarter of improved market share vs. cable.

Beyond the short-term reaction of traders, AT&T offers a nice combination of offense and defense. Wireless and Enterprise Data are growth businesses and an increasing portion of the total AT&T pie. Defense comes from a solid balance sheet, growing free cash flow, and an extremely secure dividend that currently produces a 6.3% yield.

Disclosure: AT&T is widely held in Northlake client accounts including Steve Birenberg's personal accounts.

Posted by Steve Birenberg at April 21, 2009 09:11 AM in Telephone