Can AT&T (T) Ride On Top-Line Growth For Solid Q4 Earnings?

AT&T Inc. (NYSE:T) is scheduled to report fourth-quarter 2018 results before the opening bell on Jan 30. The company is likely to record higher revenues in the quarter with solid performance from the Wireless business and incremental contribution from WarnerMedia assets.

Whether this will benefit the bottom line of the company remains to be seen.

Top-Line Expansion

During the quarter, AT&T became the first U.S. carrier to offer 5G devices over commercial mobile 5G network to provide customers the first taste of the future of connectivity. The upcoming 5G era is expected to unlock various use cases that depend on faster speed, wide coverage and low latency. AT&T has worked together with its technology suppliers to achieve this initial launch milestone. The company’s 5G service entails utilization of millimeter wave spectrum for deployment in dense pockets while in suburban and rural areas it intends to deploy 5G on mid- and low-band spectrum holdings. Such radical changes in wireless technology have helped to create new economic opportunities for consumers, and will likely translate into incremental revenues in the quarter.

The telco giant introduced mobile 5G networks in parts of 12 cities — Houston, Jacksonville, Louisville, New Orleans, San Antonio, Atlanta, Charlotte, Dallas, Indianapolis, Oklahoma City, Raleigh and Waco. The company is also planning to bring mobile 5G in certain areas of seven more cities — Las Vegas, Los Angeles, Nashville, Orlando, San Diego, San Francisco and San Jose — in the first half of 2019. Over the past five years, AT&T has invested around $145 billion in wireless and wireline networks, including capital investments and acquisition of wireless spectrum and operations. Currently, the company’s wireless network covers more than 99% of Americans. Its fiber network is one of the nation’s largest and it connects more Internet of Things devices compared to any other provider in North America.

AT&T further aims to bridge the gap between primary and secondary connectivity and lay the foundation for customers to upgrade to 5G services as and when these are available in a particular region. AT&T Wireless Broadband services offer flexible data options to meet specific needs of a business. Building on its leading fiber distribution, the company aims to upgrade its broadband offer with multiple speed tiers of up to 50Mbps.

In addition, the company is ramping up its FirstNet program and revamping its lineup of video products, pricing and promotion initiatives. AT&T's acquisition of Time Warner has further created new kinds of online videos and opened up avenues for targeted advertisements with assets like HBO, CNN and TNT. At the same time, AT&T expects to record solid growth in its advertising unit Xandr, which has an advanced cross-platform technology, enabling marketers to trade premium inventory in a transparent and automated environment. This one-of-its-kind advertising company has imbibed four key advantages from its parent firm — data, premium content, advanced advertising technology and distribution network — to more than 170 million direct-to-consumer entities across wireless, video and broadband.

Buoyed by such tailwinds, total revenues for the company are expected to be $48,427 million compared with $41,676 million reported in the prior-year quarter.

Other Key Factors

During the quarter, AT&T completed the renewal of a multi-year deal with Fox Networks Group for the distribution of most of the latter’s programming across AT&T's video platforms. This will enable the company to offer more choice as well as greater value to customers.

However, AT&T is facing a steady decline in linear TV subscribers and legacy services. High-Speed Internet revenues are also contracting due to legacy DSL decline, simplified pricing and bundle discount. Moreover, TV content-cost pressure, high programming costs and new video platform expenses are rapidly eroding margins. Continued cord-cutting remains a perennial challenge as consumers increasingly cancel pay TV packages for cheaper streaming options from Netflix (NASDAQ:NFLX), Amazon (NASDAQ:AMZN), Hulu and other services. The company’s wireline division is also 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. AT&T’s quest for faster growth will likely increase subscriber acquisition costs in both consumer and SMB (small and medium businesses) units and weigh on wireline margins.

Despite the impediments, AT&T is likely to record solid performance in the upcoming earnings release with a focused roadmap and efforts to reduce its huge debt burden.

Our proven model conclusively shows that AT&T is likely to beat earnings this quarter as it possesses the key components. A stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. This is perfectly the case here as you will see below:

Earnings ESP: Earnings ESP, which represents the difference between the Most Accurate Estimate and the Zacks Consensus Estimate, is +1.39%, with the former pegged at 86 cents and the latter at 85 cents. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: AT&T has a Zacks Rank #3. This increases the predictive power of ESP and makes us reasonably confident of an earnings beat.

Note that we caution against stocks with a Zacks Rank #4 or 5 (Sell-rated) going into the earnings announcement, especially when the company is seeing a negative estimate revisions momentum.

Other Stocks to Consider

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

Sprint Corporation (NYSE:S) is slated to release quarterly numbers on Jan 31. It has an Earnings ESP of +13.33% and a Zacks Rank #2.

Motorola Solutions, Inc. (NYSE:MSI) is scheduled to release results on Feb 7. The company has an Earnings ESP of +1.73% and has a Zacks Rank #3. You can see the complete list of today’s Zacks #1 Rank stocks here.

The Earnings ESP for Arista Networks, Inc. (NYSE:ANET) is +2.72% and it carries a Zacks Rank of 3. The company is scheduled to report quarterly numbers on Feb 14.

The Hottest Tech Mega-Trend of All

Last year, it generated $8 billion in global revenues. By 2020, it's predicted to blast through the roof to $47 billion. Famed investor Mark Cuban says it will produce "the world's first trillionaires," but that should still leave plenty of money for regular investors who make the right trades early.

See Zacks' 3 Best Stocks to Play This Trend >>