AT&T Inc. (T) Bleeds Customers in Disappointing First Quarter

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AT&T Inc. (NYSE:T) is off by about 6% so far in 2017, but T stock is trying to rebound in Tuesday’s after-market trade despite a lackluster first-quarter earnings report.

AT&T Inc. (T) Bleeds Customers in Disappointing First Quarter

Earnings for Q1 were in line with expectations at 74 cents per share. However, the top line was another story. Revenues of $39.37 billion were off nearly 3% year-over-year, and failed to reach the Street’s consensus mark of $40.53 billion.

Despite the lukewarm result, AT&T stock is up about 1% in late Tuesday action.

Smaller rivals like T-Mobile US Inc (NASDAQ:TMUS) and Sprint Corp (NYSE:S) have engaged in aggressive price wars, and it appears that’s catching up to AT&T. In the first quarter, AT&T lost 61,000 postpaid customers in North America, while analysts were expecting 95,000 additions.

In contrast, TMUS recorded 914,000 net postpaid phone subscribers in its recently reported quarter.

Among other highlights from the quarter:

  • The company’s free cash flow came to $3.2 billion
  • First-quarter postpaid phone churn was a best-ever 0.9%
  • The Entertainment Group posted 242,000 IP broadband net additions
  • 2.7 million wireless net additions
  • Updated full-year 2017 guidance including mid-sing-digit adjusted EPS growth and free cash flow of $18 billion.

 

T stock chart

T stock looks like it’s being supported by its long-term 200-day moving average, which shares have held since early December. The stock also is nearing oversold levels per its Relative Strength Index (RSI) reading.

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Yet the postpaid numbers were not the only bad news for AT&T. Keep in mind that the company’s ambitious plans to rollout a 5G network could be in jeopardy. According to a report in the Wall Street Journal, it appears that VZ may have put in a bid to derail AT&T’s proposed $1.6 billion deal for Straight Path Communications Inc (NYSEMKT:STRP), which owns a large chunk of wireless spectrum.

In other words, a bidding war is likely to make an acquisition quite expensive.

The deal is important because STRP owns spectrum that allows for high-capacity transmissions, such as for video. And of course, a key to T stock is its move to become more of an entertainment company.  This involves bold M&A, such as for DirecTV as well as the proposed $85 billion deal for Time Warner Inc (NYSE:TWX).

Bottom Line on T Stock

AT&T’s transformation strategy looks spot-on, at least for the long haul. The earnings report, if nothing else, points to the saturation of the mobile market. AT&T must diversify.

T should benefit from a rich set of new assets like Warner Bros. Studios, DC Comics (which include Batman and Superman), Home Box Office, CNN and Turner Networks. By combining these with the core distribution network, the company should achieve lower costs because of its ownership of premium content.

The business also tends to have higher margins, which generates high cash flows to keep T stock’s hefty dividend paid. AT&T currently yields 4.9%.

Yes, the company is taking on considerable risks.  The entertainment business can be extremely tough, as studios are susceptible to dry spells. There are also the mind-numbing complexities of integration. Think 2000, when AOL merged with TWX — an absolute disaster as the synergies were mostly nonexistent.

But AT&T has a long history of solid dealmaking, and it knows how to leverage its network. At the same time, the company is fairly disciplined, as cash flows have remained strong on a consistent basis (AT&T has increased its dividend for 33 straight years).

So for investors looking for an interesting play on premium content that provides a competitive yield, T stock still looks like a good option.

Tom Taulli runs the InvestorPlace blog IPO Playbook as well as OptionExercise.com, which provides interactive tools & services for employee stock options of pre/post IPO companiesFollow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.

Tom Taulli is the author of various books. They include Artificial Intelligence Basics and the Robotic Process Automation Handbook. His upcoming book is called Generative AI: How ChatGPT and other AI Tools Will Revolutionize Business.


Article printed from InvestorPlace Media, https://investorplace.com/2017/04/att-inc-t-bleeds-customers-in-disappointing-first-quarter/.

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