AT&T Sounds Good Going Into Earnings Compared To Verizon

| About: AT&T Inc. (T)


AT&T and Verizon share the same DNA, but AT&T's higher dividend makes it more attractive.

Option buyers are willing to pay much more premium than the stock's historical volatility suggest is profitable.

All eyes will focus on revenue and margins, including landlines.

AT&T Inc. (NYSE:T) is a communications holding company. AT&T trades an average of 17.8 million shares per day, and the market cap is $189 billion. Competitors include Verizon (NYSE:VZ), Sprint (NYSE:S), Charter (NASDAQ:CHTR), and Time Warner Cable (NYSE:TWC).

AT&T is forecast to report WEAK second-quarter earnings after the market closes on July 23, 2014.

The consensus estimate is currently 65 cents a share, falling 2 cents (3%) from 67 cents during the same period last year. The lowest analyst estimate this report is 60 cents per share, and the highest is 77 cents per share. The whisper numbers I have examined expect a beat of one cent.

Key metrics to watch for include the wireless pre-paid churn rate, wireless margins in general, and wirelines in service. Also, guidance is incredibly important after raising revenue guidance last quarter (as a result of the Leap acquisition). Guidance helped lift the shares higher after initially falling for the first two trading sessions after AT&T's release. I'm expecting a modest upward bias.

The shares are about as stable as you can get. It has a Beta of 0.29. Beta is a measurement of volatility compared to the overall market. The lower the number, the lower amount of volatility a stock has. 1 is the market average.

The stock is for the most part flat at 1.9% gain in the last year, and the average analyst target price for AT&T is $36.14. Verizon reports earnings the day before and should help (and influence AT&T's shares) shareholders understand what AT&T is likely to report. If you're interested in AT&T, be sure to read my earnings preview for Verizon.

Compared to AT&T's 13.3 forward price-to-earnings ratio, Verizon has a P/E of 13.20.The P/E ratio is the number of years it takes to pay for one share of stock from net profits. A forward P/E represents estimated future earnings during the next 12 months and is often highly speculative.

I like to look at call and put option pricing to get an idea of what the market is expecting. The higher the premium, the more investors are bracing for a major price move. You want to examine the contracts that expire right after the earnings release and maybe the next expiration date because AT&T offers weekly expiration contracts.

Option buyers and sellers are betting on a price change of an 87 cent up or down move in AT&T, or about a 2% change during the next 8 days.

That means, as a shareholder or potential investor, you should anticipate AT&T to trade as low as $35.58, or appreciate higher to $37.32, and still remain within one standard deviation.

After last quarter's results, the shares decreased only slightly 3.6%, or $1.3 from the close before earnings release to the closing after. The final share price preceding the report was $36.22, and concluded at $34.92 the next trading session. That's almost double the amount option traders are expecting from Verizon. Moving into Verizon's earnings, the options are only pricing in a 2% move.

From AT&T's close before last quarter's results, until the time of writing, the shares increased a small 0.6%, or 23 cents. Obviously, based on last quarter, and I looked at the last two years as well, selling premium (especially back month contracts) is advantageous over buying premium.

AT&T has once again become a major vendor's exclusive wireless carrier. Apple (OTC:APPL) started the iPhone under AT&T at first, and now Amazon (NASDAQ:AMZN) is doing the same with its new phone. I think it's interesting that Amazon picked AT&T over Verizon.

Investors are receiving $1.84 in dividends for a yield of 5.2%. Examining the dividend history of a company is a great way to help understand what we may expect in the future. Of course, the past doesn't guarantee future dividends, but it does paint a useful picture. The five-year average yield was 5.2%. Verizon's yield isn't as attractive at 4.3%.

As a result, I like both Verizon and AT&T, but when I compare the two at today's current price, I have to give the edge to AT&T. I believe the optimal strategy is to enter through selling put options. Once entered through exercise, sit back and collect the dividend quarter after quarter.

That said, expect further erosion and the eventual end of landlines (and the cashflow it generates) sooner rather than later.

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.

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Tagged: , Telecom Services - Domestic, Earnings
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