Telecom & Wireless

Is the Earnings Bar Set Lower for Verizon Than AT&T?

Credit Suisse described Verizon’s comfortable position:

  • The company continued to indicate that it does not need Dish’s spectrum.
  • Management remains confident that it is better or more efficient to build capacity by adding cell sites than paying exorbitant prices for spectrum. Adding capacity through technology could be 25% cheaper than some of the prices paid in the AWS-3 auction.
  • The company could have a unique content offering, using nontraditional content that is appealing to millennials. Much of this content could come at no cost to the subscriber, potentially supported by an ad-based model.
  • The wireless competitive environment has seemed to settle down somewhat.
  • The use of unlicensed spectrum will help offload capacity demand. Early testing has had positive results.

Shares of Verizon were up 0.5% at $47.83 Monday afternoon, in a 52-week trading range of $45.09 to $53.66. The stock has a consensus analyst price target of $51.92. Shares of Verizon are up 5.3% year to date.

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AT&T is set to share its latest quarterly earnings on Thursday. The consensus estimates call for $0.63 in EPS and $33.04 billion in revenue. In the same period of the previous year, it posted $0.62 in EPS on revenue of $32.58 billion.

Until very recently, this company was considered down and out. There was just no catalyst at all. Now the company is nearer to closing in on its DirecTV (NASDAQ: DTV) acquisition. Suddenly, analysts see massive upside for AT&T, compared to its views in the gutter just a few months ago. Investors are paying attention. AT&T provides the highest dividend yield among the mega-caps at 5.39%. With the close of the DirecTV acquisition, the dividend payout will improve to 70% (from 96% as a standalone figure last year), providing a much more comfortable level for sustainable dividend growth going forward, as the company will have a much safer margin for coverage.

Still, what stands out is that AT&T has been upgraded or given positive research reports left and right. When we ran our own bull and bear analysis on AT&T at the start of the year, the consensus price target was listed as $34.90 at that time and the highest analyst target was $40.00. Currently the stock has a consensus analyst price target of $36.74, with its highest price target from analysts at $42.

Credit Suisse continues to believe AT&T has catalysts that could drive appreciation in 2015. The catalysts at AT&T involve its transaction with DirecTV and increased guidance for synergies. In addition to this, the future for Mexico looks bright but may take some time to ramp up. AT&T was rated Outperform with a price target of $38 at Credit Suisse.

Bank of America Merrill Lynch raised its rating to Buy from Neutral late in June as well. The firm raised its price objective to $40 from $35 in its call. Merrill Lynch thinks AT&T will generate improved financial performance via a relatively more stable wireless competitive climate and from benefits in its DirecTV buyout that are higher than what the company has officially targeted.

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Oppenheimer reiterated an Outperform rating and raised its price target to $40 from $36. For 2016, the firm raised its revenue and synergies forecast for the AT&T/DirecTV pro forma and raised its EPS by four cents to $2.59.

AT&T shares were down 0.5%, at $34.83 on a 52-week trading range of $32.07 to $37.48. So far on the year, shares were up 8.7%.

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