Has AT&T Topped?

| About: AT&T Inc. (T)

When a stock posts better than expected results and is unable to trade higher, one should be concerned if all the good news has already been priced in. For high yielding telecom stocks, it was the love for yields that caused them to make new 52 week highs. However, the story seems to have changed now. Both AT&T (T) and Verizon (VZ) have traded lower on positive earnings reports. One might argue the bull run in both these telecom giants wont be over unless the treasury yields bottom out; however, we will watch the price action in T and VZ closely to see if they fail to make new highs on any further positive news.

AT&T reported its quarterly results yesterday. Despite a modest revenue growth of 0.25% in the current quarter, compared to the same quarter of the previous year, the company was unable to beat analyst expectations. Consolidated revenues came in at $31.57 billion, which even though are an improvement from 2Q2011 revenues, represent a decline from the first quarter of 2012 when the company generated revenues of $31.82 billion. Analyst expectations for revenues were $31.70 billion. The company posted EPS of $0.66, showing an improvement of 10% from both 1Q2012 and 2Q2011, beating the consensus analyst estimates of $0.63.

AT&T 2Q2012 Results

Actual

Expected

Surprise (%)

Revenues (billions)

$31.60

$31.70

-0.32

EPS

$0.66

$0.63

5

Click to enlarge

Wireless

Wireless revenues for the quarter increased by 5% compared to 2Q2011. The company's operating income from wireless operations improved by an impressive 13%, as compared to the previous quarter. Moreover, the second quarter also ranks above any other with regards to a high operating income margin.

For 2Q2012, the margin expanded to almost 30% from 2Q2011's 27%. This improvement in margins for the company's wireless business was largely due to a reduction in the subsidies that the company pays due to slower than expected upgrades by its customers. According to the company, a majority of its customers own smartphones, which also played a part in the current quarter's revenue growth. A rise in upgrade fees and increasing the upgrade eligibility period also helped. Moreover, the launch of the new iPhone 5 is expected sometime in December, which helped its wireless profitability in the second quarter, as the company didn't incur too much cost in the form of subsidies.

Going forward, an impressive growth in wireless margins would likely slow down due to the launch of the iPhone. Overall, the key drivers for the wireless business have improved YoY, with a few exceptions. T added 320,000 postpaid subscribers in 2Q2012, which even though beats the consensus estimates, is behind the 331,000 subscribers that the company added in the same quarter of the previous year. These additions are well below Verizon 's postpaid additions for the quarter of almost 890,000. Similar deterioration can be seen in its prepaid additions for the quarter, where it only added 92,000 subscribers compared to 2Q2011's 137,000. However, other key business metrics like average revenues per user and churn rates continue to improve for the company. In the second quarter, the postpaid churn dropped to a record low 0.97% and improvements were also seen in total churn, which dropped to 1.18% from 2Q2011's 1.43%.

AT&T 2Q2012 RESULTS

2Q2011

2Q2012

WIRELESS

Volumes (000s)

Postpaid customers

68,353

69,666

Prepaid customers

6,750

7,473

Postpaid net adds

331

320

Prepaid net adds

137

92

postpaid churn

1.15%

0.97%

Total churn

1.43%

1.18%

Wireless ARPU

$48.18

$47.07

Segment revenues

$15.6b

$16.3b

Segment earnings

$4.2b

$4.9b

Click to enlarge

Wireline

Revenues from the company's wireless business continued on their downward trend in the second quarter of the year, down almost 1% from 2Q2011. Revenues showed a slight deterioration from the last quarter of 2011 as well. A decline in the company's voice revenues was largely responsible for this decrease. During the quarter, the company lost almost 100,000 internet users. U-verse television subscriber additions for the quarter also dropped to 155,000 customers from the previous quarter's additions of 200,000 customers.

AT&T 2Q2012 RESULTS

2Q2011

2Q2012

WIRELINE

Revenues ( millions)

Data

$7,349

$7,923

Voice

$6,340

$5,697

Total revenues

$15,030

$14,904

U-Verse subscribers

5.25mn

6.8mn

Click to enlarge

Despite the revenue drop, the company's wireline business' operating income margin improved to almost 14%, compared to 12% for the previous quarter.

The company's business solution revenues have declined on a quarterly basis and continue to be a source of worry for the company. According to a news report, the company doesn't expect things to get better going forward, and blames the prevalent economy and the resultant careful spending by businesses for the lack of growth in its business solution revenues.

Since the company announced its quarterly results, the stock is down almost 2%. The company's weaker outlook for its business solutions operations led to this drop. Moreover, investors believe that the company will experience a contraction in its margins once Apple (AAPL) launches its iPhone 5 in the fall. Despite a potential drop in the stock, it remains attractive for its high dividend yield of 5%. However, we think one should avoid buying T for capital appreciation purposes. The stock is already up 15% YTD. Both, VZ and T can continue their move down as yield hungry investors get concerned about the run up in share prices. Keep in mind that VZ is trading lower too despite positing better than expected results. We expect a similar trend for T to continue for near future.

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