AT&T's Mobile Margins Kept in Check by Competition

Sep.20.10 | About: AT&T Inc. (T)

AT&T (NYSE:T) has been facing intense pricing pressure from competitors like Sprint Nextel (NYSE:S) and Verizon (NYSE:VZ) that has caused a slight erosion of its profit margins for mobile phones and plans business. AT&T also faces competition from cable operators like Comcast (NASDAQ:CMCSA) and Time Warner Cable (NYSE:TWC), as well as independent VoIP providers like Skype and Vonage.

We currently have a Trefis price estimate of $38 for AT&T’s stock, about 36% above the current market price of $28. AT&T’s stock is very sensitive to its profit margin for mobile plans & phones, as this business constitutes around 45% of AT&T’s stock.

Historically, Mobile Plans & Phones Gross Profit Margin has decreased from 70% in 2003 to around 60% in 2009 [1]. This decline can be attributed partly to heavy subsidization of new smart-phones like Apple’s (NASDAQ:AAPL) iPhone. We expect margins to be under pressure due to slower economic recovery and intensifying competition.

The average Trefis member forecasts for Mobile Plans & Phones Gross Profit Margin indicate a projected decrease from around 60% in 2010 to 58.4% by 2016, roughly in line with the baseline Trefis estimate of a decrease from 60% in 2010 to 58.5% by the end of the Trefis forecast period. The member estimates imply a small downside to the Trefis price estimate for AT&T’s stock.

Our complete analysis for AT&T’s stock is here.

Note: Calculated based on reported division-wise direct costs and revenues

Disclosure: No positions