It may be a giant of a company and a cash cow, but without any growth to speak of, AT&T Inc. (NYSE:T) shareholders have become increasingly frustrated with the company.
The evidence? The fact that AT&T stock has fallen 16% since last year’s high, for starters … a period during which most other stocks made sizable gains.
Of course, the first quarter’s slight revenue lull and not-so-slight earning contraction confirmed T stock holders were right to be worried.
Tuesday afternoon’s second quarter earnings report was not only a chance for the company to redeem itself, but also a chance for AT&T stock to be rekindled. The company did just that, and the stock followed suit.
AT&T Earnings Recap
For the accounting period ending in June, AT&T earned 79 cents per share on sales of $39.87 billion. Analysts were calling for earnings of 73 cents per share and revenue of $39.79 billion.
That top line expectation was a tad weaker than the year-ago figure of $40.5 billion, while the profit outlook was just a tad better than the 72 cents per share of AT&T stock earned in the second quarter of last year. Operating cash flow rolled in at $8.9 billion, and free cash flow totaled $3.7 billion.
The company also added 2.8 million wireless subscribers for the recently ended quarter, handily topping expectations of only 1.08 million.
CEO Randall Stephenson commented on the second quarter’s results:
“Once again our team delivered expanded consolidated margins and, as a result, grew adjusted earnings per share by nearly 10% as we executed well against our business priorities. And in a quarter where our competitors used promotions aggressively, we added more than 500,000 branded smartphones to our base and more than 100,000 IP broadband subscribers, achieved record EBITDA wireless margins and had the lowest postpaid phone churn in our history. We continue to expect the Time Warner deal to close by year-end and further transform the company.”
Those record Ebitda margins were an impressive 41.8%, suggesting at the very least AT&T is managing tepid growth very efficiently.
Stephenson is doing most of what he can to drive sustained growth. But, the competition from other players like Verizon Communications Inc. (NYSE:VZ) and Sprint Corp (NYSE:S) is downright fierce within the telecom arena.
Perhaps the biggest weapon AT&T is developing in its war against its rivals, however, lies a bit outside traditional telecom boundaries. Stephenson is steering the acquisition of media conglomerate Time Warner Inc (NYSE:TWX), which will effectively make AT&T the message and the messenger. That is to say, not only will AT&T own the “pipes” that deliver audio and video content, it will also own a big chunk of audio and video content.
Such bundling that crosses lines previously uncrossed is quickly becoming the new norm. Case(s) in point: Verizon now owns Yahoo, and in combination with its AOL property gives the telecom player access to millions of users and their valuable consumer-habit data.
At the same time, Discovery Communications Inc. (NASDAQ:DISCA) is doing everything it can to make sure that it’s not just a creator of great television content, but that it’s in charge of the means of distributing it in a revenue-bearing way. One of these approaches includes an experiment with selling it directly to consumers, bypassing middlemen.
Though the AT&T/Time Warner deal has run into the headwinds of antitrust chatter, the rational for blocking such a pairing is a weak one; the deal is expected to go through.
Also on the company’s developmental plate is a cutting-edge 5G platform.
This fifth-generation technology offers wireless internet connectivity that’s roughly twice as fast as the typical 4G connection used by most smartphone owners. Though AT&T isn’t the only telco working on making the possibility reality for its customers, it’s arguably rolling it out the most aggressively, aiming to offer it in 20 major markets before the end of the year.
It may be enough of a draw to win new customers … at least those who need faster downloads for their devices.
In the meantime, AT&T appears to be making some much-needed progress on the telecom front. T stock was up more than 2% in after-hours trading following the Q2 earnings report.
Looking Ahead for AT&T Stock
All in all it wasn’t a bad second-quarter report. The results did prove once again, however, that AT&T needs something outside of its current core businesses to spur meaningful growth.
The Time Warner deal is its best shot in that regard, though closing that deal is still months off, and it could take several more months to figure out how to best integrate the two companies for maximum revenue and profits.
To be fair, AT&T has done it before. The telecom giant completed its acquisition of DirecTV in 2015, and it didn’t take long for customers of both organizations to see promotions for the other’s services; AT&T even offered discounts for existing customers of both companies.
The approach is working, too. Wireless subscribers with DirectTV are up 31% since the deal closed, and DirecTV subscribers who now have a wireless plan are up 18% since the two organizations merged. Adding DirecTV to the menu has also driven down churn rates for postpaid wireless subscribers.
Similarly bundled offers are expected to materialize following the consummation of the Time Warner purchase.
Nevertheless, there’s a learning curve to be navigated, and the time needed to work through it may not be time owners of AT&T stock are willing to give it … especially in light of the fact that organic growth has been muted of late.
Tuesday’s post-news gain is respectable, but not necessarily built to last. Only time will confirm that Q2 wasn’t just a one-hit wonder.
Still, the news earned AT&T stock a spot on your watchlist.
As of this writing, James Brumley held a long position in AT&T.