AT&T (T) 5G Launch Remains On Track, Margin Woes Persist

On Apr 16, we issued an updated research report on AT&T Inc. (NYSE:T) , one of the largest wireless service providers in North America.

5G, the next phase of mobile telecommunication standards, marks a revolution in the field of communications and technology. AT&T is gearing up to launch the first standards-based mobile 5G services to consumers in multiple U.S. markets by the end of 2018. The company has been working hard since 2017 to lay the foundation for mobile 5G network and has completed network upgradation in 23 major cities.

In August 2017, AT&T deployed 5G technology trials in three new cities — Waco, TX; Kalamazoo, MI and South Bend, IN. In December 2017, the company initiated its largest 5G fixed wireless trial in Waco, TX, partnering with the home and lifestyle brand, Magnolia. The company claims it to be the largest trial in terms of mobile traffic. Notably, completion of 3rd Generation Partnership Project’s first implementable 5G New radio (NR) specification has set the stage for the global mobile industry to start full-scale development of 5G NR for large-scale trials and commercial deployments in 2019.

AT&T is also likely to immensely benefit from its long-pending merger with Time Warner Inc. (NYSE:TWX) , with the combined entity expected to become a major player in the consolidated telecom-media space. Since the announcement of the $85.4-billion cash-and-stock deal in October 2016, the industry has been rife with speculations over whether the deal will get regulatory approval. The pending merger has been approved by antitrust officials in 17 countries and is waiting for the same from Brazil and the United States.

AT&T has gained approval from the European Commission and from the Mexican telecommunications and broadcasting services regulator for this deal. However, the deal awaits further clearances from other regulatory bodies. Post a lawsuit filed by the U.S. Department of Justice in November 2017, the companies have further extended the closure date to Jun 21, 2018, to clear regulatory issues as the matter remains sub judice. Given the prevailing uncertainties, the company is likely to go on the offensive to seek a verdict in its favor.

AT&T has almost performed in line with the industry with an average loss of 4.7% in the last three months against a decline of 4.6% for the latter.

Moreover, in a saturated wireless market, spectrum crunch has become a major issue in the U.S. telecom industry. Most of the carriers are finding it increasingly difficult to manage mobile data traffic, which is growing by leaps and bounds. The situation has become even more acute with the growing popularity of iPhone and Android smartphones as well as rising online mobile video streaming, cloud computing and video conferencing services. This has hurt the profitability of the company.

In addition, the company’s wireline division is struggling with persistent losses in access lines as a result of competitive pressure from voice-over-Internet protocol service providers and aggressive triple-play (voice, data, video) offerings by the cable companies. These are weighing on the company’s revenues and margins. Moreover, AT&T’s quest for faster growth will increase subscriber acquisition cost in both consumer and SMB (small and medium business) units and put pressure on wireline margins.

Nevertheless, we remain impressed with the inherent growth potential of this Zacks Rank #3 (Hold) stock. Some better-ranked stocks in the industry are SITO Mobile, Ltd. (NYSE:T) and China Mobile Limited (NYSE:CHL) , each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

SITO Mobile has a long-term earnings growth expectation of 25%.

China Mobile has a long-term earnings growth expectation of 5%.

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