Why AT&T Could Be An Unlikely Buy

Jul.17.14 | About: AT&T Inc. (T)

Summary

In this article, we’re focusing on AT&T’s quarterly earnings forecasts.

Despite them having drifted downwards in recent weeks, we think there could be positive surprises.

As such, we think there could be an alpha opportunity going long in AT&T.

AT&T's Quarterly Forecasts

There are 28 analysts covering AT&T (NYSE:T) in the forecasts in which we are focusing on in this article. Their estimates for the second quarter range from a low of $0.60 per share to a high of $0.77 per share, with the consensus forecast being $0.65 per share. If this were met, it would represent a fall of $0.02 per share from the company's performance in Q2, which is something of a disappointment.

Similarly, the next quarter's forecasts indicate a flat performance when compared to the same quarter from 2013, with EPS expected to come in at $0.66. The range of the forecasts is similar to that for the quarter just passed, with a low of $0.61 per share and a high of $0.76 per share. This is, again, a disappointing forecast since it shows that AT&T is struggling to deliver any growth in its bottom line, and without this it could be difficult for the share price to move upwards.

Forecast Trends

Moreover, AT&T's quarterly forecasts have been steadily moving downwards in recent weeks. For instance, three months ago the consensus forecast for Q2 was as high as $0.72, with this figure gradually falling to rest at its current level of $0.65. This is a fall of 9.7% in three months and shows that past optimism surrounding AT&T has had to be managed downwards as it has become clear that the company may not be able to deliver previously anticipated levels of growth.

The same is true of the current quarter's forecast, which has fallen from $0.71 per share to the current level of $0.66 per share. This is a 7.0% fall and indicates that Q2 may not prove to be a one-off and that future quarterly forecasts should be adjusted downwards. In other words, it does not appear that the downwards adjustments to Q2 were one-offs, which does not bode well for AT&T going forward.

Earnings Surprise

Despite all of the above, there may yet be an alpha opportunity for investors in AT&T. Sure, forecasts have come down significantly over the last few months and they have not just fallen for one quarter, which indicates that it is unlikely to be a one-off, but we feel that there could be an earnings surprise in the current quarter's results. That's because we feel that there is scope for earnings to surprise on the upside, since AT&T posted an impressive growth rate in its wireless segment in the first quarter of the year, with it increasing by 7% versus the prior year's quarter. In addition, various initiatives have helped to improve the wireless segment's top-line growth, with strong pricing plans for 10GB or larger data plans for new customers, for instance. Such initiatives will, we believe, help to deliver improved top-line growth in the current quarter (AT&T said it expected top-line growth of at least 4% for the full year), which should filter down to the bottom line. Certainly, the pricing environment remains tough, but we feel that it is not tough enough to put margins under as much pressure as the market currently anticipates. Indeed, AT&T said in its first quarter update that it expects consolidated margins to remain stable throughout the year.

Therefore, we think that the optimism that was present just a few months back (when forecasts were higher) has been eroded too far. Sure, those forecasts were a tad optimistic, but the company is doing enough right now to deliver improved year-on-year earnings numbers. Indeed, in Q3 2013 AT&T posted earnings that beat consensus forecasts by 1.5%. We feel that a similar occurrence could take place this time around, with the analyst community having become overly-pessimistic with regards to AT&T's short-term performance. Therefore, with expectations being pretty downbeat, a positive surprise could cause shares to be in-demand and could mean that AT&T's share price increases going forward.

Conclusion

We feel that there is an alpha opportunity on offer at AT&T. Although earnings forecasts for Q2 and Q3 show a year-on-year decline and flat performance respectively, we think the company could deliver a better performance than the market expects. Indeed, we feel that earnings forecasts have drifted downwards to too great an extent in recent weeks and, as such, earnings could surprise on the upside - just as they did in the third quarter of 2013. Therefore, we remain bullish on AT&T's share price prospects going forward.

What do you think of AT&T? Would you buy, sell or hold right now? Please comment below!

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.