Trump, Earnings and the Trouble With AT&T Inc (T) Stock

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Communications giant AT&T Inc. (NYSE:T) has been the focus of much speculation recently, especially where its proposed buyout of Time Warner Inc (NYSE:TWX) is concerned. The company is scheduled to join the earnings parade on Wall Street on Wednesday of next week, but many investors may be eyeing tomorrow’s inauguration with more trepidation given President-elect Donald Trump’s disdain for the TWX deal.

Trump, Earnings and the Trouble With AT&T Inc (T) Stock

All-in-all, it’s going to be a bumpy ride for T stock over the short-term.

By the numbers, AT&T is expected to post a fourth-quarter profit of 66 cents per share on revenue of $42.08 billion. EarningsWhispers.com puts the whisper number on par with the consensus estimate, and AT&T stock investors shouldn’t expect any real surprises for the quarter.

Guidance, however, may be another matter entirely. T stock has joined in on the Trump rally to the tune of about 10% since the election, despite negativity surrounding AT&T’s proposed acquisition of Time Warner. While approval of the deal shouldn’t impact T stock’s longer-term outlook, it could wreak havoc on short-term volatility and leave guidance in limbo for the time being.

T Stock and 5G

Meanwhile, AT&T is expected to roll out 5G wireless this year. Comments on this rollout, which begins as a test program in Austin, Texas later this year, could have a bullish short-term impact for T stock as the technology will give AT&T a significant edge over the competition.

However, Verizon Communications Inc (NYSE:VZ), Sprint Corp (NYSE:S) and T-Mobile US Inc (NASDAQ:TMUS) have all announced plans for similar 1Gbs class wireless offerings for 2017. With both Sprint and T-Mobile offering wireless plans with no data caps, AT&T’s lead among cord-cutters and gamers will be short-lived at best.

And then there are analyst opinions on T stock, which are far from inspiring. According to Zacks data, T stock has garnered just six buy ratings compared to 12 holds. Additionally, T stock is trading just 1.4% below the 12-month consensus price target of $41.40.

In other words, the brokerage community doesn’t see much upside for T stock in 2017, with many analysts likely sticking to their positions unless the TWX deal goes through.

T Stock
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 On a more short-term basis, AT&T options traders have taken a negative view of T stock. The Jan./Feb. put/call open interest ratio currently rests at 1.26, with bearishly oriented puts easily outnumbering calls during the next two months. This is especially telling on the TWX/T tie-up front, given that traders looking for arbitrage deals ahead of potential mergers and buyouts typically look to call options for leverage.

Narrowing our focus to AT&T’s earnings report, the outlook grows a bit more positive. In fact, the 27 Jan. put/call OI ratio comes in at 0.83, with calls gaining a bit more clout when it comes to T stock’s potential earnings reaction. Overall, 27 Jan implieds are pricing in a possible move of about 3% for T stock, putting the upper bound at $42.12, while the lower bound rests at $39.66 from today’s open.

2 Trades for T Stock

Bear Put Spread: Barring any major developments or significant shifts in guidance, T stock may show little reaction in the wake of next week’s quarterly report. What’s more, with Trump sure to weigh in (on Twitter at least) on the TWX deal again, it might be smart to fade any post-earnings bump.

Traders looking to take a bearish stance on T stock over what could be a volatile month might want to consider a Feb $39/$40 bear put spread. This spread was last offered at 20 cents, or $20 per pair of contracts. Breakeven lies at $39.80, while a maximum profit of 80 cents, or $80 per pair of contracts, is possible if AT&T closes at or below $39 when Feb. options expire.

Call Sell: On the other hand, T stock has quite a few followers on Wall Street, including institutional traders. Additionally, any positive note in the company’s earnings report could still attract an upgrade or two, providing a bit of ballast for the shares, but ultimately leaving them all but range bound over the short-term.

One way to use options to profit from this development is to sell out-of-the-money calls — especially if you own AT&T stock. Traders taking this neutral-to-bearish stance might consider selling the Feb $43 strike call. If you already own T stock, this call sell allows you to offset some of your portfolio losses in the event of stagnation, but also allows you exposure to any upside up until the stock trades at or above $43.

At last check, this option was bid at 12 cents, or $12 per contract. This sold call allows you keep the premium as long as T stock closes below $43 at expiration. On the downside, if AT&T rallies above $43 prior to expiration, you could be forced to provide 100 shares at current market value for each call sold, which could be quite costly if you do not have enough stock on hand to cover the call.

As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.

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Article printed from InvestorPlace Media, https://investorplace.com/2017/01/att-inc-t-stock-trump-earnings/.

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