- Reports Q4 2018 results on Wednesday, January 30, before the bell
- Revenue Expectation: $48.5 billion
- EPS Expectation: $0.86
After its $85 billion acquisition of Time Warner assets last June, AT&T (NYSE:T), the U.S.'s largest telecom operator, doesn’t have much time to prove to wary investors that the deal was a bet worth taking. The doubters outnumber those who believe the company's strategy to fight entertainment content disruptors such as Netflix (NASDAQ:NFLX) will stop the hemorrhaging due to cord cutting, which is eating away at AT&T's revenue base.
Shares are down about 20% over the past one year, underperforming both its close rival, Verizon (NYSE:VZ) and the broader S&P 500 media and entertainment sector. Which all makes the company’s fourth-quarter earnings report, scheduled for later this morning, very important for investors.
The period which ended in December will be the second quarter when AT&T will have a chance to prove the benefits of having absorbed Time Warner’s assets under its umbrella. Analysts, on average, are expecting a 10% increase in its earnings per share to $0.86, and a 16% surge in sales to $48.5 billion.
Debt-Laden Growth Strategy; Overcrowded Market
Still, even if the company beats analyst expectations for the last quarter, we don’t see its shares resuming a sustained upward journey anytime soon. Our pessimism on this is very simple: AT&T’s legacy businesses are rapidly losing their shine and its debt-laden growth strategy has many hurdles to overcome.
In the third-quarter, earnings before interest, tax, depreciation and amortization (EBITDA) at its entertainment group, a key business for improving AT&T’s operating performance, continued to disappoint. The division’s EBITDA shrank about 9% to $2.4 billion as DirecTV lost hundreds of thousands of satellite subscribers.
The other drag on AT&T share price is coming from its huge pile of debt—about $175 billion—that the company accumulated over the past three years, a result of its Time Warner and DircTV acquisitions. These two deals have levered AT&T's balance sheet to 3.9 times EBITDA, at a time when operating income is shrinking and the company is under immense pressure from both shareholders and regulators. The Justice Department is seeking an early decision on its review appeal on a court decision that allowed AT&T to buy Time Warner (NYSE:TWX) this past summer.
To squeeze the best out of Time Warner's content assets, AT&T has announced it will launch a direct-to-consumer streaming service in late 2019. This will compete directly with Netflix, Hulu, Amazon.com (NASDAQ:AMZN) and Disney’s (NYSE:DIS) own soon-to-launch streaming service.
However, in our view, the video-streaming landscape is becoming too competitive. Companies with deeper pockets will have better chances of success than AT&T, whose priority right now should be to cut its debt load and save its credit rating.
Bottom Line
Betting on AT&T shares, which closed yesterday at $30.70, just because the company wants to become a modern media business is risky. The company is facing too many hazards that could put the kibosh on its ambitions and force management to cut its rich, $2.04 a share dividend to preserve cash.
The corporate environment is full of examples of ambitious growth plans that quickly soured, especially when they were fueled by massive debt. AT&T's stock, even with its 6.65% dividend yield, doesn’t compensate investors enough for the risk they’re taking.