AT&T: More Signs The Rally Is Over

| About: AT&T Inc. (T)


AT&T easily slid past analyst EPS estimates that failed to incorporate merger benefits.

The wireless giant saw a few negative trends surface that might cap future growth.

The stock is likely to plateau at the current level where shareholders collect a 5% dividend yield while waiting for the next catalyst.

Q1 results from AT&T (NYSE:T) back up my investment thesis that the company would continue to push EPS towards $3 on the backs of the DirecTV merger. The theory back when the stock traded around $32 throughout 2014 and most of 2015 was that the stock was extremely cheap with plenty of catalysts. Now with AT&T trading at $38, the valuation equation isn't as clear with user growth slowing and synergies somewhat in place.

Source: AT&T website Click to enlarge

AT&T reported an EPS of $0.72 that sailed past analyst estimates of $0.69. The nearly 11% increase in the adjusted EPS is a real testament to the benefits of the merger where synergies are only now partially in the results. Analysts only forecast the company earning $2.84 for the year and the Q1 results should prop up that number.

Margins are at high levels and should continue rising including the best-ever wireless EBITDA service margins.

Click to enlarge

While the margins are strong, some negative trends are starting to poke above the surface. The two most prominent were the loss of pay-TV subscribers and the higher wireless churn rate.

For Q1, AT&T lost 54,000 video subscribers as the company shifted users off U-verse to satellite TV. In the short term, this move was originally estimated to save up to $17 per subscriber in monthly content costs. The shift is good for the bottom line, but the implications are that the wireless giant did jump into the satellite business at the peak.

The key postpaid churn figure grew to 1.10%, up from 1.02% in the year-ago quarter. The churn was most notable in the key business mobility division where postpaid churn grew to 1.02%, compared to 0.90% last Q1.

The churn rates aren't a big concern at this point, but the trend is pointing to negative implications that T-Mobile (NASDAQ:TMUS) is indeed grabbing customers. The market will not like higher churn rates in the future and customer acquisition costs could rise if AT&T starts losing more customers whether wireless or video.

The key investor takeaway is that earnings beat estimates and healthy margins set the company up to earn close to $3 per share this year. The real unanswered question is where the growth will come from as the triple-play opportunity from the DirecTV merger isn't leading to growth in the important pay-TV and postpaid wireless customers.

The recent rally from $32 to $38 probably reduces the likelihood that the stock rallies much further. AT&T still offers a dividend yield in excess of 5% so the stock is more likely to hold at the current levels until the wireless giant shows how the loss of the top customers ends up generating long-term gains for shareholders.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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