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Telecom stocks have been a haven in 2022, with the big U.S. companies leading the market after a challenging 2021 performance. Second-quarter earnings season will be the next test for the group.
AT&T
(ticker: T) and
Verizon Communications
(VZ) have both raised prices or limited device promotions on some of their plans this year, while
T-Mobile US
(TMUS) has kept pricing steady. On the cost side of the equation, labor, energy, and other expenses are up—not a phenomenon unique to telecom firms. How those trends affected second-quarter profit margins and subscriber growth—and what management teams predict for the second half of 2022—will be key areas of focus for investors and analysts.
AT&T
stock has returned 16% including dividends year to date, versus a nearly19% loss for the
S&P 500
.
Much of that outperformance has come since early April, when the telecom giant completed a spinoff of
WarnerMedia
—which subsequently merged with Discovery to create Warner Bros. Discovery (WBD)—and refocused on the telecom business. The company is investing to build out a nationwide 5G wireless network and extend its wired fiber-optic network to more locations.
AT&T will report its second-quarter results on Thursday before the market opens. Analysts on average expect 61 cents in adjusted earnings per share, which would be down 9% from the same period last year, on $29.5 billion in revenue (down 33% largely reflecting the shedding of WarnerMedia). The company has topped Wall Street EPS estimates for eight consecutive quarters.
On average, analysts forecast adjusted earnings before interest, taxes, depreciation, and amortization—or Ebitda—of $10.4 billion, net income of $4.0 billion, and free cash flow of $4.7 billion. AT&T stock has a dividend yield of 5.4% and a market capitalization of $147 billion.
“AT&T highlighted in June that inflation costs were expected at the start of the year but are running hotter than the initial expectation, and we look for commentary about margin trends on the call,” wrote
J.P. Morgan
analyst Philip Cusick. “We would not be surprised to see more AT&T price increases later in the year to offset inflation in labor, energy, and component costs.”
Investors will want to hear about cost management, deleveraging plans, and any updates to AT&T’s Ebitda and free cash flow guidance for this year and next.
On the subscriber front, the Wall Street consensus is for postpaid net additions—an all-important metric for wireless companies that refers to customers who pay a monthly bill—of about 546,000, including 400,000 phones. That would compare with an average of 1.1 million postpaid net adds per quarter during 2021, which was a blockbuster year for customer growth in the U.S. wireless industry. AT&T is also expected to add a net 294,000 fiber subscribers.
Verizon reports Friday morning. Its stock has returned 1.8% including dividends this year. Wall Street consensus calls for $1.33 in adjusted earnings per share, down 3%, and roughly flat revenue of $33.7 billion. Verizon hasn’t missed its consensus EPS estimate since 2019.
Wall Street analysts are also expecting adjusted Ebitda of $12.2 billion, net income of $5.6 billion, and free cash flow of $5.0 billion. Verizon stock has a dividend yield of 5.4% and a market cap of $214 billion.
The subscriber expectations are less optimistic for Verizon in the second quarter. On average, analysts expect postpaid net additions of 268,000, including 151,000 phones.
“VZ’s recent price increases will add ~$2B of annualized revenue/Ebitda in 2H’22 and 2023, modestly boosting near-term numbers,” wrote
Wells Fargo
analyst Eric Luebchow. “However, we think the longer-term picture now looks murkier. Checks would suggest consumer gross add volumes were weak in Q2; and we expect downward revisions to 2H’22 subscriber numbers due to both weaker gross adds and higher churn, with over 90 million lines subject to fee increases.”
Investors will want to hear from management about the expected impact of price increases on subscriber growth and profits. Verizon lowered its 2022 guidance with its first-quarter report in April.
For T-Mobile, continued progress on its integration with Sprint’s network and operations will be a big topic when it reports on the morning of July 27. T-Mobile management tends to take a combative tone each quarter, calling out Verizon and AT&T. Expect to hear plenty of talk contrasting its “Un-Carrier” strategy with rivals’ price hikes. Investors will also want to hear about stock repurchase plans.
“While we expect a reiteration of long term plans around a buyback, we don’t expect a formal buyback announcement to come until a little later in the year as T-Mobile awaits favorable rating agency actions, Sprint network migration, and the upcoming rural 2.5 GHz auction,” wrote
Morgan Stanley
analyst Simon Flannery.
Analyst consensus is for earnings per share to be down 67%, to 26 cents, in the second quarter, reflecting costs associated with shutting down portions of Sprint’s network and migrating those legacy customers. Revenue is expected to be up 1%, to $20.1 billion.
T-Mobile is also forecast to deliver adjusted Ebitda of $6.8 billion, net income of $280 million, and free cash flow of $1.5 billion. It’s expected to lead the industry in second-quarter subscriber growth, with consensus calling for postpaid net additions of 1.2 million, including 559,000 phones.
T-Mobile stock is up more than 18% this year. The company has a market value of $172 billion.
Write to Nicholas Jasinski at nicholas.jasinski@barrons.com