Will Lower Communications Revenues Dent AT&T (T) Q4 Earnings?

AT&T Inc. T is scheduled to report fourth-quarter 2020 results before the opening bell on Jan 27. In the fourth quarter, the company is likely to have recorded lower revenues year over year from the Communications segment due to the adverse impacts of the coronavirus pandemic and continued infrastructure investments for 5G deployment across the country.

Factors at Play

The Communications segment has three business units — Mobility, Entertainment Group and Business Wireline.

In the fourth quarter, AT&T expanded its 5G network infrastructure in various markets to take the tally of cities with 5G+ service to 38 across the country, serving more than 225 million people. AT&T is benefiting from lower levels of wireless churn due to access to 5G on its unlimited wireless plans for consumers and businesses and growing adoption of Unlimited Elite wireless plans. The company continues to invest in its wireless and wireline networks to expand coverage and improve connectivity. These initiatives are likely to be reflected in the upcoming results for the Mobility business.

During the to-be-reported quarter, AT&T expanded its collaboration with industry partner Ericsson to offer private cellular networks that help enterprises meet their specific connectivity requirements. Driven by an end-to-end, self-contained network for greater flexibility and operational control, the private network delivers an optimized network infrastructure for mission-critical operations and mitigates risks relating to routing of data over public networks. Such technology collaborations are likely to have translated into higher revenues for the Business Wireline division.

During the quarter, the U.S. Army selected FirstNet to support firefighters, law enforcement and security personnel at 72 Army installations across the country and Puerto Rico. Per the deal, AT&T will provide almost 3,200 lines of FirstNet services with 3,000 FirstNet-capable devices and 700 signal boosters to help improve indoor connectivity. The company will also offer staging and kitting of devices, including preloading multiple FirstNet apps on the devices. This is likely to have been accretive to earnings in the fourth quarter.

However, continued infrastructure investments for extensive fiber connectivity and the deployment of a standards-based nationwide mobile 5G network are likely to have affected the bottom line. AT&T has limited visibility into the extent of the impact of COVID-19. Moreover, less international travel due to travel restrictions in the wake of the new virus strain might have dragged down roaming revenues in the wireless segment. Furthermore, waiving of wireless voice and data overage fees for all customers and expanded eligibility for low-income Internet programs are likely to have drained the exchequer.

Q4 Developments

During the quarter, AT&T refinanced debt at historically low rates to improve its liquidity position and reduce the burgeoning debt burden. The move is likely to de-risk its capital structure as the company prepares to navigate through the challenging macroeconomic environment. The company currently has about $30 billion of debt due through 2025. It expects to generate cash flow in excess of $26 billion in 2020 with a dividend payout rate of more than 50% as it aims to reward shareholders with attractive risk-adjusted returns.

Overall Expectations

The Zacks Consensus Estimate for revenues from Communications is pegged at $35,780 million, indicating a modest decline from $36,522 million reported in the year-ago quarter. Operating income is pegged at $7,103 million, implying a fall from $7,512 million reported in the prior-year quarter. The consensus mark for EBITDA from the segment stands at $11,833 million, suggesting a decline from $12,101 million.

The Zacks Consensus Estimate for total revenues of the company stands at $44,547 million, indicating a 4.9% decline from $46,821 million reported in the prior-year quarter. The consensus mark for earnings is currently pegged at 73 cents per share. It had reported 89 cents in the year-earlier quarter.

Earnings Whispers

Our proven model does not predict an earnings beat for AT&T for the fourth quarter. The combination of a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) increases the chances of an earnings beat. This is not the case here.

Earnings ESP: Earnings ESP, which represents the difference between the Most Accurate Estimate and the Zacks Consensus Estimate, is -1.35%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

AT&T Inc. Price and EPS Surprise

AT&T Inc. price-eps-surprise | AT&T Inc. Quote

Zacks Rank: AT&T has a Zacks Rank #4 (Sell).

Stocks to Consider

Here are some companies you may want to consider, as our model shows that these have the right combination of elements to post an earnings beat this time around:

T-Mobile US, Inc. TMUS is set to release quarterly numbers on Feb 4. It has an Earnings ESP of +11.17% and a Zacks Rank #3. You can see the complete list of today’s Zacks #1 Rank stocks here.

The Earnings ESP for Sensata Technologies Holding plc ST is +2.50% and it sports a Zacks Rank of 1. The company is set to report quarterly numbers on Feb 2.

The Earnings ESP for Altice USA, Inc. ATUS is +3.11% and it carries a Zacks Rank of 3. The company is scheduled to report quarterly numbers on Feb 10.

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