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Earnings Preview: Telecom Takes the Stage with Verizon and AT&T

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October 18, 2017
Radio station and telecommunication tower
istockphoto.com/aluxum

Within every bull market, there’s always going to be areas that are lagging behind. Parts of the telecom sector have been among  them so far in 2017. Year to date, several of the largest companies have seen their shares drop in the low double-digits. And ahead of earnings reports, it’s the only sector in the S&P 500 (SPX) projected to report a year-over-year decline in revenue, according to FactSet.

In recent years, the landscape has become increasingly competitive amid consolidation within the industry, as well as companies expanding into each other’s markets. CNBC recently reported that T-Mobile (TMUS) and Sprint (S) are in active merger talks, the biggest players have announced major acquisitions focused on expanding their media and entertainment offerings, and Comcast (CMSCA) rolled out its wireless service, Xfinity Mobile, earlier in the year and also announced a wireless partnership with Charter Communications (CHTR).

Over the next week, two telecom giants are slated to release their third-quarter results, providing a glimpse at the performance of two of the biggest wireless carriers in the country by market cap. Verizon Communications (VZ) reports earnings before market open on Thursday, October 19 and AT&T (T) reports after market close on Tuesday, October 24. Below we’ll take a look at what might be expected from their results. 

Stock chart showing YTD performance of Verizon and AT&T compared to the S&P 500

FIGURE 1: A VOLATILE QUARTER.

Telecom usually doesn’t come to most people’s minds when talking about volatile sectors, but in the third quarter, several telecom stocks have traded over a wide range and their implied volatility has been on the high end. The year-to-date performance of Verizon (VZ) as the purple line,  AT&T (T) as the yellow line and the S&P 500 (SPX) as the teal line is shown in the chart above. source: thinkorswim® by TD Ameritrade.  Data source: Standard & Poor’s. Not a recommendation. For illustrative purposes only. Past performance does not guarantee future results.

Verizon Communications Earnings and Options Trading Activity

With the wireless carriers, a primary focus for analysts is on their postpaid net additions or decreases, which are the number of subscribers the carrier gained or lost, and churn rates, which are the percentage of customers that stopped subscribing to services. After reporting worse-than-expected results on this front in the first quarter, VZ rebounded in the second quarter.

The company reported 614,000 retail postpaid net additions and a retail postpaid churn of 0.94%, which it attributed to momentum from the launch of Verizon Unlimited in February this year. VZ reported that revenue in the wireless segment declined 1.9% year-over-year to $21.3 billion.

In its wireline segment in the second quarter, the company reported that revenue increased 1.2% year-over-year to $7.8 billion. Excluding revenues from recently acquired  XO Communications and divested data centers, VZ said revenue in that segment declined 2.8% compared to the prior-year quarter. CFRA analysts have said they expect greater penetration of FiOS services, which grew 4.4% year-over-year in Q2, might help offset declines in its wholesale business.  

For the third quarter, VZ is expected to report adjusted earnings of $0.98 per share, down from $1.01 in the prior-year period, on revenue of $31.15 billion, according to third-party consensus analyst estimates. Revenue is projected to increase slightly from the 30.94 billion generated in the third quarter last year.

Around the upcoming earnings release, options traders have priced in about a 2.7% potential share price move in either direction, according to the Market Maker Move indicator on the thinkorswim® platform. In short-term trading at the October 20 expiration, calls have been active at the 48 and 49 strike prices, while puts have been active at the 47 and 48 strikes. As of this morning, the implied volatility sits at the 74th percentile.

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.

AT&T Earnings and Options Trading Activity

T suffered more than a 6% drop last Thursday when it disclosed that it would lose more traditional TV subscribers than originally expected. The company said the DirecTV Now streaming service gained 300,000 subscribers in the third quarter, but its traditional pay-TV service lost 390,000 subscribers, for a net loss of 90,000.

T cited a variety of reasons for the drop including hurricanes, changes to its credit standards for new customers and heightened competition in pay-TV markets and over-the-top (OTT) services—OTT services are ones that deliver content over the Internet as opposed to a traditional cable box or other distribution system.

The recent drop pushed T’s dividend yield to a bit over 5%. However, several analysts have cautioned the company’s revenue declines and debt load could pressure the dividend in the future if challenging business conditions persist.   

Right now, the company is also working through its proposed acquisition of Time Warner (TWX), which CFRA analysts think could unlock new growth opportunities and position the company to meet growing demand for “TV Everywhere”. They did note that they are wary of the potential conditions regulators might stipulate for the deal to be approved.

For the third quarter, T is expected to report adjusted earnings of $0.75 per share, up a penny compared to last year, on revenue of $40.25 billion, according to third-party consensus analyst estimates. Revenue is projected to decline 1.5% year-over-year.

Ahead of its upcoming earnings release, options traders have priced in about a 3.5% potential share price move in either direction, according to the Market Maker Move indicator. Since there are still several trading days before T reports, this information is likely to shift to a degree. 

In short-term trading at the October 27 expiration, calls have been active at the 36 and 37 and puts have been active at the 35.5 and 36 strikes. Like VZ, the heaviest trading has been in the options closest to the at the money strikes. As of this morning the implied volatility is on the high end of the range at the 93rd percentile.

Looking Ahead

In addition to earnings, another thing to consider keeping an eye on this week is China’s 19th Communist Party congress. It only happens every five years and China’s top leaders will be meeting to determine who will be running the country and what their focuses will be for the next five years. It’s an event that has the potential to bring heightened volatility to Chinese stocks in the coming weeks. Also, if you have time, check out today’s market update to see what else is happening.

Good Trading,
JJ
@TDAJJKinahan

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