Are the Telcos Shrinking?

Includes: T, VOD, VZ
by: Eric Savitz

The telcos are shrinking.

At least, Bernstein Research analyst Craig Moffett thinks so. In a research note Monday morning cutting his price targets on the two phone companies, he contends that on an “organic, equity-adjusted basis,” both Verizon (NYSE:VZ) and AT&T (NYSE:T) are now shrinking at the top line. He calculates that Verizon, when adjusted for Vodafone’s (NASDAQ:VOD) 45% stake in Verizon Wireless, is now shrinking by about 0.5% a year. AT&T, he says, is shrinking 0.4%. And he contends that in both cases, the rate of decline is accelerating.

Profits, he adds, are in even worse shape. Adjusted for M&A and the Vodafone stake in Verizon Wireless, and stripping out post-retirement expenses, he finds that Verizon’s EBITDA in the latest quarter fell 3.3%, while AT&T’s adjusted EBITDA was off 5.8%. “More troublingly, these declines appear weighted toward secular, rather than cyclical, root cases,” he writes.

“Wireline margins have continued to decline, and the cause once again appears to be primarily secular rather than cyclical,” he writes. “On an as-reported basis, AT&T’s wireline margin fell 440 basis points year over year, and Verizon’s 280 basis points. Even after adjusting for post-retirement costs, AT&T’s wireline margins fell 170 basis points year over year, and Verizon’s by 190. Sequentially, he notes, wireline margins were down 40 basis points at Verizon, and 60 basis points at AT&T.

As for their wireless business, Moffett ntoes that growth there is sharply decelerating, with industry growth now just 3.6%. “VZ and T continue to gain share, but in a less attractive market,” he writes. “Increasingly, they are just the best house on a bad block.”

In response to the trend, Moffett Monday trimmed his price target for T to $24, from $27; for VZ, he goes to $25, from $27. He maintains a Market Perform rating on AT&T, and keeps his Underperform rating on Verizon.

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