Despite Near-Term Noise, Wells Fargo Sees Higher Upside in Verizon and AT&T

Telecom & Wireless

Published: March 28, 2016 11:20 am

Last Updated: January 13, 2020 11:28 am

Some analysts have not been very fond of big telecom and the high dividends that come along with it. Wells Fargo has decided to remain bullish on shares of AT&T Inc. (NYSE: T) with its 5% dividend yield, and the firm has become even more bullish on shares of Verizon Communications Inc. (NYSE: VZ). Wells Fargo’s Jennifer Fritzsche has retained her Outperform ratings on both with above-consensus price targets.

Note that the reports do look for some industrywide bumpiness before the coming upgrade cycle in the second half of 2016. That might lead some into thinking there is more caution, but investors have to consider that it is the job of analysts and investors to look ahead rather than to be surprised about the known trends of the current quarter.

Verizon was said to be seeing soft upgrade activity, with its equipment installment plan (EIP) transition pressuring the first quarter. The firm adjusted its Verizon numbers to reflect a slower first-quarter handset upgrade cycle. Continued service revenue headwinds from its transition from subsidized to the installment-based pricing were cited. Wells Fargo lowered its service revenue to $16.9 billion, down 5.7% from a year ago. This reflects an increasing number of subscribers receiving discounted EIP pricing.

Wells Fargo also lowered its equipment revenues for the first quarter to $4.2 billion, up 25% from a year ago but down from the prior estimate of $4.9 billion. That lower base was primarily on lower first-quarter gross add and upgrade volumes. The report said:

We now expect first quarter postpaid upgrades to be 5.5% of Verizon’s base, down from our previous 6.5% projection. We believe this weakness in upgrade activity is consistent with the trends at the other carriers and reflects the lack of a recent “iconic” device launch. The handset upgrade cycle has also been expanding in length, with consumers increasingly holding onto phones for longer periods. We believe Verizon will reach a positive “inflection” point on service revenue once over 50% of its base is on is counted EIP pricing (currently just over 40%).