U.S. Wireless Carriers Weekly Review: AT&T, Verizon, Sprint

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The ongoing price wars have started troubling U.S. wireless players AT&T (NYSE:T) and Verizon (NYSE:VZ). This was evident from AT&T’s announcement last week that it was expecting higher postpaid churn in the fourth quarter. Verizon also indicated that its Q4 margins were likely to come under pressure due to the ongoing promotions, though it was experiencing strong momentum in subscriber adds. This is likely due to the race-to-the-bottom pricing strategies adopted by Sprint (NYSE:S) with its most recent “Cut Your Bill in Half” event. Below we discuss the noteworthy events pertaining to the top U.S. carriers from the last two weeks.

AT&T

Speaking at the 42nd Annual UBS Global Media and Communications Conference, AT&T’s CFO John Stephens stated that the company was expecting higher postpaid churn rates in the fourth quarter due to rising competition. Stephens also stated that the ongoing price war will negatively impact its fourth quarter margins. However, he stated that full year 2014 churn and margins were still expected to be better than last year’s figures. AT&T’s postpaid churn rate in 2013 was 1.06% and in Q3 2014 was 0.99%. [1]

  • AT&T’s stock was down more than 5% over the last week, primarily due to the carrier’s Q4 warnings and its estimated high spending in the ongoing AWS-3 spectrum auction. However, it recovered over 2.5% this week through Thursday on reports that the company is planning to cut down on capital expenditures by virtualizing 75% of its network by 2020.
  • We currently have a $36 price estimate for A&T, which implies a market cap of around $189 billion compared to the current market cap of about $167 billion. ((AT&T to Virtualize 75% of its Network by 2020, Wall Street Journal, Dec 16 2014))

Verizon

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Growing competition and the ongoing price war in the U.S. wireless market will continue to put pressure on Verizon’s margins in the fourth quarter, company CFO Fran Shammo stated at the UBS Global Media and Communications Conference earlier this month. In terms of subscriber additions, he stated that the carrier was doing well, with postpaid gross adds growing both sequentially as well as year-over-year. He also said that customer phone upgrades driven by new product launches were significantly contributing to the strong demand for 4G devices on the carrier’s popular “More Everything” plans. In other developments, the FCC’s ongoing AWS-3 spectrum auction is reported to have already garnered $43 billion in winning bids. Verizon and AT&T are estimated to have been the most active players in the auction, which has added to investor concerns over rising costs and declining profits for the major carriers.

  • Verizon’s stock was down over 3% over the last two weeks through Thursday, primarily due to the carrier’s Q4 margin warning and its estimated high spending in the ongoing AWS-3 spectrum auction.
  • We currently have a $53 price estimate for Verizon, which implies a market cap of $219 billion compared to the current market cap of about $193 billion. 
  • We estimate revenues of about $124 billion for Verizon in 2014, with non-GAAP EPS of $3.56, which is in line with the market consensus of $3.45-$3.66, compiled by Thomson Reuters.

Sprint

Sprint recently introduced a new plan to attract customers and give a boost to its declining postpaid subscriber base. As part of its “Cut Your Bill in Half” event, Verizon and AT&T users can cut their monthly bills in half if they switch over to Sprint’s network. The scheme follows other promotions introduced by the carrier’s new CEO, Marcelo Claure, to get back to positive postpaid subscriber growth. [2] In another important announcement, the FCC is set to levy a fine of about $105 million on Sprint for “mobile cramming”, two months after AT&T was fined on similar charges. “Mobile cramming” relates to unauthorized charges levied by Sprint to its subscribers for services such as ringtones, wallpapers, horoscope subscriptions and celebrity gossip.

  • Sprint’s stock dropped about 16% to around $4 over the last two weeks through Thursday, on continued concerns on the company’s profitability and sustainability of its business strategy.
  • We maintain our $6.50 price estimate for Sprint, which implies a market cap of about $26 billion.
  • We estimate revenues of about $36 billion for Sprint in calendar year 2014, with non-GAAP loss per share of $0.29, which is in line with the market consensus of $0.00-$0.75 loss, compiled by Thomson Reuters.

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Notes:
  1. AT&T’s (T) Management Presents at UBS 42nd Annual Global Media and Communications Conference (Transcript), Seeking Alpha, Dec 9 2014 []
  2. Sprint’s Announcement []