AT&T Likely to Miss a Call – An Earnings Call

With only a week or so left of the fourth quarter and of 2011, it’s almost time for another earnings season to kick off as companies begin to announce their results for the period, starting with Alcoa on January 9, 2012. The StarMine research team at Refinitiv is therefore hunkering down to develop a list of those companies it expects to beat and miss earnings estimates for the period, relying on the signals provided by SmartEstimates and the Predicted Surprise tool.

We are beginning our own review of those companies we expect to be big winners or losers when it comes to beating fourth-quarter earnings estimates with a look at telecommunications provider AT&T. Given the drama surrounding the company’s bid to acquire T-Mobile USA from Deutsche Telecom (DT), which AT&T just dropped rather than engage in a prolonged and possibly futile effort to win US regulatory approval, that seemed like a logical place to start our survey – especially since AT&T now must pay nearly $4 billion to Deutsche Telecom as a “breakup fee” for failing to complete the T-Mobile purchase. (For more details on the story, read this article by Reuters News.) But that fee, however gargantuan isn’t the only reason AT&T seems unlikely to post earnings for the fourth quarter that will manage to match or exceed the current I/B/E/S consensus estimate of 45 cents a share.

The chart below shows that even before the T-Mobile acquisition was scrapped, analysts were already becoming less bullish about AT&T’s earnings prospects for the quarter. The SmartEstimate (represented by the blue line below) currently stands at 40 cents a share, down from 55 cents a share only 90 days ago. That figure is adjusted to overweight the timeliest forecasts made by those analysts with the most solid track records. The Predicted Surprise of -13% leads us to believe that either the I/B/E/S median forecast will continue to fall, closing the gap with the SmartEstimate, as the clock ticks down and the company’s reporting date looms larger on the horizon and as other analysts trim their forecasts. Alternatively, if that gap remains, it is likely that the company will fail to meet that I/B/E/S consensus estimate when it reports earnings.

Examining these estimates more closely reveals that one analyst has a “bold” estimate of 42 cents a share, sticking his neck out with a rating that is notably different from those made by his peers. StarMine flags an estimate as a “bold” estimate when an analyst with a five-star StarMine rating issues an estimate that differs significantly from the consensus. Whenever a top-ranked analyst does this, we want to pay attention, as the reason these individuals are so highly rated is that they have so often been accurate.

Even without the collapse of the T-Mobile transaction, AT&T faces some significant headwinds that appear likely to eat into its profitability. While many analysts expect the number of subscribers demanding smart phones to grow more rapidly than expected this quarter, that’s not necessarily good news for AT&T’s bottom line since the telecom provider subsidizes those devices in order to attract and retain mobile phone subscribers. That’s one reason analysts cite as a reason for earnings to take a hit this quarter. Another is the need for AT&T to spend more to acquire additional spectrum to serve its ever-increasing customer base now that it won’t be acquiring the T-Mobile spectrum as part of that deal. Keep an eye on the company in the coming months as it hunts for ways to boost its spectrum as rapidly as possible.

And keep an eye on AlphaNow, too, as the StarMine research team at Refinitiv keeps its readers informed on which stocks seem likely to miss or beat earnings estimates this quarter. In the third quarter, the team had an 80% hit rate (for details on its projections and the outcome, see this report). Using SmartEstimates and the Predicted Surprise, they’ll help you determine what the most accurate equity valuation is for companies in the spotlight this earnings season, as well as identify those companies whose earnings look likely to diverge from what is expected from them.

Learn more about how StarMine analytics can help you pinpoint critical developments in your portfolio or watch list. Request a free trial today.