After the recent rally to new multi-year highs, AT&T (NYSE:T) is making us work on how to handle the stock going forward. Up until the last couple of months, the stock was an easy buy, the dip prediction with strong dividend support and several catalysts for higher prices.
Closing the day at $35.40 and only matching Q4 EPS estimates actually makes the stock expensive compared to Verizon Communications (NYSE:VZ). Unless the wireless provider can push through the forecasted synergies, the stock isn't that exciting. Did AT&T provide the market enough to support another move higher?
What Happened To The Bull Case?
The bull case was that $2.5 billion in synergies from the DirecTV merger would lead to substantially higher profits. In addition, the new AT&T could sell bundled services to existing wireless or satellite customers to easily expand the amount of offerings per customer.
The results since the transaction closed still don't suggest that the combination is leading to any synergies with customer additions. My last article questioned why the company wasn't gaining any traction on earnings growth. In fact, the entity actually lost video subscribers in the quarter.
One of the biggest fears with the merger was that AT&T was aggressively stepping into the pay-TV segment when the market was shifting to the over-the-top concept. The quarterly results actually back up the fear that the merger top ticked the market.
For Q4, AT&T saw total video subscribers decline 26,000. While the company added 214,000 U.S. satellite subs, the U-verse TV subscribers plunged by 240,000. Clearly AT&T is pushing customers towards the DirecTV service that has lower equivalent content costs. Swapping a customer from U-verse to satellite makes sense, but actually losing customers reinforces the best of breed concept that a bundled product doesn't always achieve.
The wireless customer additions weren't much better. Though AT&T added plenty of branded customers and connected devices, the math actually leads to a reduction in postpaid branded phones of 170,000. The churn numbers were excellent suggesting AT&T is keeping existing customers and failing to attract customers switching from other networks.
Source: AT&T Q4'15 presentation
In essence, the promise of bundled services isn't coming through. The sweet spot was getting AT&T postpaid wireless customers to sign up for satellite service and vice-versa. In both cases, the key customers actually declined instead of seeing boosts.
Limited Earnings Growth
The end result of the Q4 numbers and 2016 guidance is that the pro forma expectations for an EPS in excess of $3 isn't coming to fruition. AT&T still guides to mid-single digit EPS growth.
With the company earning $2.71 for 2015, the forecast is for a 2016 EPS of roughly $2.85 at 5% growth.
The number is basically in line with analyst forecasts and doesn't incorporate much in the way of achieving the $2.5 billion synergies. The full synergy would provide a $0.40 benefit to earnings.
The story isn't over yet for AT&T heading higher. The wireless provider is now ramping up wireless service in Mexico and added 638,000 branded customers in the quarter. Some of the synergies in the wireless and video segments could actually kick in during 2016.
Ultimately though, the company might struggle to grow the key customer bases as more focused competition grabs customers looking for best of breed and not bundled services. The stock offers a stable 5.4% dividend yield, but the upside in the stock appears very limited unless the proposed benefits from the merger actually come true.
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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