Telecom Giants AT&T and Verizon to Open Books, Offer Outlook on 5G

Two telecom giants, AT&T (T) and Verizon (VZ), are set to release earnings, and analyst consensus is for modestly higher results versus those from a year ago.

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5 min read
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Key Takeaways

  • Verizon and AT&T deliver telecom earnings this Friday and next Monday
  • Investors await updates on 5G technology, activist activity, debt load at AT&T
  • Earnings expected to rise year-over-year for both firms, analysts say

As the core of earnings season plows ahead, telecom giants Verizon (VZ) and AT&T (T)—two stocks often considered defensive plays—could get a close look from analysts and investors for reasons ranging from activist activity to 5G mobile technology.

T has been through a lot this past quarter. With activist shareholder group Elliott Management—which has a $3.2 billion stake in the stock—flexing its muscles by encouraging a leadership shakeup and aggressive moves to restructure wireless plan costs to consumers, it’s no wonder T’s stock has been flagging in recent days. But it’s still running to the upside, pushing 30% higher since the start of the year.

That’s arguably a good thing, considering company shares have lagged the S&P 500 Index (SPX) for most of the last five years, or since about the time that T announced its $49 billion acquisition of DirecTV, according to S&P Capital IQ. See figure 1 below.

Verizon, AT&T lag SPX
FIGURE 1: CROSSED LINES. Though shares of telecoms AT&T (T – purple line) and Verizon (VZ – blue line) have advanced over the last five years, share prices have lagged the broader S&P 500 (SPX – candlestick) by a pretty substantial margin. Data source: S&P Dow Jones Indices. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

T’s most recent major deal completed last year to fork over $85 billion for Time Warner didn’t exactly rock the house either, from a share price standpoint.

Stay Tuned for WarnerMedia Day

Analysts widely expect Q3 results, due ahead of the market open Monday, Oct. 28, to see some uptick. T changed its earnings date so that it would run closer to the next day’s WarnerMedia Day, when the company will present its new direct-to-consumer streaming service HBO Max. It’s expected to launch in the spring of 2020.

T’s C-level leaders think the new streaming service will be a big hit, if you consider Chairman and CEO Randall Stephenson’s comments at a recent Goldman Sachs conference.

“We think a company that can put together premium media content creation and production with networks would have a significant strategic advantage,” he said in a talk at the conference that was videotaped.

“The content creation business is changing,” Stephenson added. “And it’s not changing by a little. It’s changing rather radically.” T apparently thinks it will be part of that new dynamic.

In the meantime, T management has been negotiating its way around demands from Elliott Management. The Wall Street Journal noted in an editorial last week that the group’s “relatively small stake doesn’t in principle deserve a hearing,” but said the telecom giant might be able to “swat away” a few of Elliott’s more dramatic ideas if it just settles on a few of its lesser asks now.

The newspaper expects the WarnerMedia Day’s much-anticipated HBO Max streaming service offering “to cement the company’s place in the increasingly competitive streaming media universe.” Stay tuned.

AT&T’s Lingering Cost of Acquisition

Investors shouldn’t lose sight of T’s debt load, which ballooned to as high as $195 billion after the acquisitions of DirecTV and Time Warner. It held $169 billion in debt at the end of last quarter, when it said it would cut debt by another $12 billion in the second half and hopefully be in a position to look at stock buybacks. But as competitive pressures continue to build, analysts may be looking to find out more. Debt reduction, stock buyback, and capital investment together could be like having their cake and eating it too. 

But perhaps right-sizing operations and consumer pricing could be part of the answer. T announced earlier this month that it was shedding its wireless and wireline operations in Puerto Rico and the U.S. Virgin Islands in a $1.95 billion cash deal that could help T’s balance sheet.

And it said last week that it was upping its online TV service prices—again. It will be the second time this year that it’s nudging prices higher, up as much as 30% beginning next month, T said. Many analysts said they see this as a means to the debt end, which should help widen margins.

AT&T Earnings and Options Data

T is expected to report adjusted earnings of $0.93 a share compared with the prior-year quarter  EPS of $0.90, according to third-party consensus analyst estimates. Revenue is projected at $45.1 billion, down from $45.7 billion in the year-ago period.

The options market has priced in an expected share price move of about 3% in either direction around the earnings release.

Looking at the Nov. 1 weekly expiration, call activity has been highest at the 38.5 and 39 strikes, while puts have been active at the 36 and 36.5 strikes. The implied volatility sits at the 46th percentile as of Tuesday morning. 

Note: Call options represent the right, but not the obligation, to buy the underlying security at a predetermined price over a set period of time. Put options represent the right, but not the obligation to sell the underlying security at a predetermined price over a set period of time.

VZ and the Race to 5G      

For VZ, it’s all about 5G, which it touted in its Q2 earnings: “Verizon made history this quarter by becoming the first carrier in the world to launch 5G mobility,” Chief Executive Hans Vestberg said then. “We are focused on optimizing our next-generation networks and enhancing the customer experience while we head into the second half of the year with great momentum.”

Analysts said they’ll be anxious to hear how that’s all going when VZ opens the books ahead of the market opening on Friday, Oct. 25.

VZ tends to be a fan favorite of many analysts who have market perform or above ratings. Bernstein, for example, initiated coverage of VZ last week at market perform, calling it “the mobile industry leader with an exciting network vision and upside to its dividend payout ratio.”

As we’ve noted over the past few quarters, analysts said they’ve been watching the 5G rollout and related company announcements closely. It’s considered by many to be the next technological generation of connections that promise higher speeds and lower latency—the time it takes to transfer data—to vastly improve streaming experiences.

As we’ve pointed out before, don’t get too hyped up about what 5G might mean because there are so many issues still not ironed out, with federal regulations and the costs to consumers chief among them.

For example, Craig Moffett, a telecom analyst at boutique research firm MoffettNathanson, recently brought up another issue that investors might be interested in: How will carriers like VZ and T capitalize off of 5G?

Moffett counts himself among analysts who aren’t so sure 5G will live up to the hype. It will be a costly undertaking for telecoms, and some analysts have been questioning how they’re going to make money off it. In his analysis of the last nine years, wireless data consumption has surged “89-fold” while revenue per device has been sinking, down 12.6% over the same period.

“Simply using more data at higher speeds—we’ve all heard about the dream of downloading a full season of Game of Thrones in seconds before boarding a plane—has up to now been a dry well for wireless revenue generation,” he wrote.

“With most currently identified use cases of somewhat dubious merit, we do expect that getting to a dense and ubiquitous 5G network, and more importantly, a robust 5G ecosystem of networks and use cases, will take longer than people think,” he added.

Analysts say they’ll be listening for more information about how VZ expects to overcome those fears. But a tie-in to streaming is certainly expected to be part of it. On Tuesday morning, VZ executives announced the company would be teaming up with Disney (DIS) to offer customers a free year of the fledgling streaming service, Disney+.

As with other disruptive innovations—the personal computer and cellular technology among them—5G may lead to new technologies not currently on consumers’ radar screens. Today’s niche luxury sometimes becomes tomorrow’s necessity.    

Verizon Earnings and Options Data

VZ is expected to report adjusted earnings per share of $1.24, up from $1.22 in the prior-year quarter, according to third-party consensus analyst estimates. Revenue is projected at $32.7 billion, up modestly from $32.6 billion a year ago.

The options market has priced in an expected share price move of 2.1% in either direction around the earnings release, according to the Market Maker Move™ indicator on the thinkorswim® platform.

Call activity has been higher at the 61 and 61.5 strikes, while puts have been active at the 60 and 60.5 strikes. The implied volatility sits at the 13th percentile as of Tuesday morning.

Good Trading,
JJ
@TDAJJKinahan

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Key Takeaways

  • Verizon and AT&T deliver telecom earnings this Friday and next Monday
  • Investors await updates on 5G technology, activist activity, debt load at AT&T
  • Earnings expected to rise year-over-year for both firms, analysts say
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