October 22, 2008

Big Shadow: Next Few Qs Loom Large as Earnings Season Kicks Off

For what it's worth, AT&T kicks off the 3Q reporting season for cable/telcos/DBS Wed. But given the economic bomb that's gone off in recent weeks, no one is expecting 3Q numbers to shed much light on the uncertain times ahead. "There's a palpable sense that everything changed—for AT&T and everyone else—around the middle of Sept, when Lehman declared bankruptcy and the credit situation went from crunch to crisis," Sanford Bernstein's Craig Moffett said in a note to clients. Things have certainly changed for multichannel stocks as well. Most have joined the overall market in shedding chunks of value recently, a slide that begs these questions: will any negative 3Q results or news send related shares down further, and will any heartening data provide notable propulsion? Industry "valuations are quite low, suggesting pricing is pretty fully baked for a dismal economic forecast already," said Moody's analyst Russell Solomon. Over the next few weeks, expect ears to perk up any time company brass make the slightest mention of 4Q during earnings calls. Stifel Nicolaus told clients that it does expect to see the beginnings of some consumer-driven pressures in 3Q, suggesting that sub additions for basic cable, Verizon's FiOS and wireless data ARPUs could be under "mild pressure." But overall, the firm thinks companies in its media sector, which includes AT&T, Time Warner Cable and Verizon, delivered solid, if unspectacular results, with significant FCF generation. For the most part, AT&T is expected to post sound adds on the wireless side, led by Apple's iPhone, while landline losses are expected to continue and possibly even accelerate. Thomas Weisel increased its 3Q estimate for access lines losses to 1.99mln from 836K. It predicted 100K new broadband connections and 250K U-Verse video adds. Sanford Bernstein's Moffett told clients that he suspects the good will outweigh the bad for AT&T, and that a combination of low expectations and a steady rollout of U-Verse "have set the stage for what might be a string of positive surprises as their video offering begins to gain traction." The bottom line from Moffett: "Yes, AT&T will feel the headwinds of a worsening macro outlook. But we expect 3Q results to show that AT&T is well-equipped to weather the storm."