Is AT&T a Buy as Earnings Approach?

AT&T (NYSE:T) will announce earnings before the market opens on January 29. The consensus estimate is for the company to report earnings of 87 cents per share and revenue of $46.97 billion. The earnings would be a 1 cent per share increase from the same quarter last year. The revenue, however, would be down just over 2% from the prior year.

This would mark the second consecutive quarter that AT&T beat on earnings but fell short on revenue. One reason for the miss on revenue is the company’s loss of traditional video subscribers. However, in the third quarter, AT&T saw a 3.7 million net increase in wireless subscribers. The company expects that this number will continue to grow. And since the company’s wireless division generates the most significant portion of AT&T’s revenue, this would be welcome news.

Where is AT&T stock today?

 Shares of AT&T are up nearly 25% in the last 12 months, but have been largely flat thus far in 2020.

Like many telecom stocks, AT&T is commonly viewed as a defensive stock for investors and with good reason. The company is a dividend aristocrat that has increased its dividend for 35 consecutive years. The dividend has grown at an average rate of 2% per year.  The stock currently has a dividend yield of over 5%.

5G or Not 5G? Where is the Growth Coming From?

Much of the noise about the telecom industry has been about the emerging 5G technology. AT&T, along with its competitors Verizon (NYSE:VZ) and T-Mobile (NASDAQ:TMUS), is one of the best pure plays in 5G. But like the other companies, AT&T is being slightly held back while the 5G infrastructure is built out throughout the nation.

Even with that said, AT&T is continuing to expand its 5G network. In early January, the company’s CFO John Joseph Stephens told attendees at a Citi Conference that AT&T had 5G-plus service running in 35 cities with an additional 20 cities up and running for 5G.

This is significant because AT& T is in a fierce war with T-Mobile to build a 5G network. In December, the company had launched its 5G service in 10 markets. And although the company’s 5G network is a “low band” network it is faster than T-Mobile’s network. And AT&T is expecting a boost from the launch of 5G phones. To that end, the Samsung (OTCMKTS:SSNLF) Galaxy Note 10+ is currently available nationwide.

For investors, this leaves a question. Is AT&T’s growth in 2019 factoring in what 5G is or what 5G will be?

AT&T Has Opportunities Beyond 5G

AT&T has another element to its business model that some say is a benefit, while others say it will drag the stock down. The company spent a significant amount of money to acquire content from Time-Warner. This new business unit which is called WarnerMedia and includes HBO is a way for AT&T to enter the streaming wars. This unit accounted for $33 billion in 2018.

But will this acquisition provide a boost for the stock? Some analysts are skeptical for two reasons. First, they are concerned that AT&T is late to the party. Second, there is concern about whether consumers will be drawn to the Time-Warner content when they have other streaming options to choose from, including Disney’s (NYSE:DIS) new service Disney+.

Another roadblock for the stock is DirecTV. In an era of cord cutting, AT&T saw a 16% decline in subscribers in 2019. Analysts are suggesting a further erosion of this audience in 2020, but at a slower rate. One anchor for this segment may be DirecTV’s continued contract with the National Football League as the exclusive provider for NFL Sunday Ticket. There is some concern that AT&T will not choose to continue with the Sunday Ticket when the current contract ends. However, DirectTV still holds the contract through at least the upcoming 2020 season.

And DirecTV generates a significant profit margin from Sunday Ticket subscribers. In fact, many subscribers only choose DirecTV because of the Sunday Ticket package. Even if AT&T loses “seasonal subscribers” who only have DirecTV to get access to the Sunday Ticket, those customers are likely to come back when the 2020 season starts.

What’s next for AT&T stock?

Analysts are giving AT&T stock a consensus rating of hold. Their 12-month price target would suggest that analysts perceive that there are better values for investors. The Warner Media story has yet to be written, but I don’t see it as having a significant impact on the stock. Verizon is the only competitor that can match AT&T’s ability to maximize the potential of 5G in the near term. So AT&T’s core business should continue to grow. And for investors driven by fundamentals, they can look at AT&T’s PE ratio which at 17.16 is very favorable to Verizon.