Third quarter financial reports for 2012 are out. To some analysts' surprise, AT&T (T) did slightly better than expected. As the largest telecommunications company based in the U.S., it recently beat financial analysts' predictions on profit margins, although this was without any help from the lower than expected supply of Apple's iPhone 5 in the market. In fact, the much talked about low inventory of this newest rendition of the iPhone this past year negatively affected the number of new customers who signed onto AT&T - only about 151,000 new subscribers were added during this period, which is merely a fraction of what Wall Street expected - but still, AT&T experienced an unexpected record cash flow. As of mid-October, 2012, AT&T sales increased by 63 cents a share, three cents up from what was initially predicted by analysts. This is despite a sales drop-again, mostly due to the low supply of the iPhone 5 - of about 0.1 percent from the previous quarter.
AT&T has long been a company that has thrived on unexpected mergers and technological innovations, most recently a product of the merging of SBC Communications Inc. and Southwestern Bell Corporation (2006). Currently, as the fourth largest non-oil company in the United States - behind Wal-Mart Stores (WMT), General Electric (GE) and Bank of America (BAC), its financial history displays savvy and strategic business moves that has helped it not only survive, but to become a corporate empire that has a bigger gross national product than some countries. With a keen eye on technological innovation, AT&T has transformed itself over and over again, in order to keep up with digital technology. Remember the huge dot-com boom in the early 2000s? AT&T shares were at a record high, selling at $58 a share. And although AT&T stock is not nearly as expensive as it once was, with the importance of wireless telecommunications it's still certainly a secure - if not necessarily hugely profitable - bet. At the same time, it may be due time that AT&T starts to shake things up in order to strengthen its profit margins, which have been lagging as of late. This may mean reconfiguring the relationship with Apple (AAPL).
AT&T's close ties with Apple - in particular, with the iPhone - has been both a blessed and cursed relationship, as evident by the low new customer sales this past third quarter (almost exclusively due to the low supply of Apple's iPhone 5). In the first few years of iPhone sales, AT&T initially profited immensely. But as the cost to drive up gains became gradually higher for AT&T, these costs started to eat away at the performance of AT&T's stock, while strengthening Apple's. In other words, it is evident that the financial relationship between these two financial powerhouses has become somewhat lopsided. In particular, the seemingly lightning speed of iPhone upgrades have hurt AT&T. Some financial analysts, then, predict that AT&T, as well as other wireless providers, will hold back the rising phone upgrade rates. This, in turn, will not make Apple very happy.
Let's look more closely at the ways that a low iPhone 5 supply has affected the overall financial health of AT&T during this past year, especially in the ways that it has strengthened sales and the stock price of AT&T's main competitor, Verizon (VZ). While new AT&T customers numbered at 319,000 in the previous year, the company attracted less than half this number this year. And although AT&T has made up for this steep sales loss through the decrease of subsidies that need to be paid out to customers (such as programs that allow customers to buy iPhones at more affordable prices - AT&T eats up those costs), analysis suggests that AT&T is losing out to its competitor, Verizon. A good example is that this past year, while AT&T struggled to sign new customers, Verizon signed ten times more customers than expected. One can guess that many of the customers who signed onto Verizon did so because of the low supply of iPhone 5. Let's now look at the strength of shares for each stock. Currently, AT&T is selling at about $35per share, and is down by less than half a percent (0.29). Its current EPS is holding steady at 0.75, with a dividend yield of 0.44/5.05. For Verizon, the current price per share is about $44, which is up by nearly one percent (0.93). In the past 52 weeks, shares have averaged between $35.17 and $48.77, with a dividend yield of 0.51/4.63. Its EPS is holding steady at 1.07. Although Verizon is a smaller company than AT&T - it holds an average trading volume of 14.72 million shares, compared to AT&T's 21.46 million shares - recent analysis correlates lower sales of iPhones 5 with a decrease in the number of AT&T's average shares, as last year, AT&T's stock volume averaged 27.74 million shares. As AT&T averaged a positive growth of 3.67 percent in net profit margin, Verizon experienced a 10.74 percent growth. This, then, is nearly twice the net profit margin of Apple's.
What does this mean for AT&T and for those who own AT&T stock? It does not seem that AT&T will experience severe downs or losses any time soon, but at the same time, don't expect to make much money from the stock. At least for now.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.