2 Factors Likely To Influence AT&T's Q4
Jefferies expects AT&T Inc. (NYSE: T)’s fourth quarter to be impacted by NFL programming costs and the pending 2G shutdown.
As such, the brokerage cut its fourth quarter and FY16 EPS estimates by $0.02 each to $0.63 and $2.82, respectively.
“Based on our analysis, we believe Street models may not be appropriately capturing the impact to entertainment margins, as well as wireless volumes,” analyst Mike McCormack wrote in a note.
The analyst has a point as 13 of the 17 NFL games are to be played in the fourth quarter. Assuming about $75 million per game, McCormack expects third quarter costs of about $225 million and fourth quarter of about $977 million, amounting to roughly $750 million of incremental costs.
“Accordingly, we raise 4Q programming expense from $5.5bn to $5.7bn, and in turn, lower Entertainment EBITDA margins from 23.2% to 21.8% (down 210bps sequentially),” McCormack noted.
Meanwhile, AT&T is shutting down its 2G network to reclaim allocated spectrum and the analyst estimates 2G accounts for less than 1 percent of quarterly revenue.The analyst also sees the 2G shutdown to be accretive to margins, though it could take multiple quarters to realize the cost savings.
In addition, Jefferies has a Buy rating and reiterated the stock as its Top Pick with $48 price target.
“Despite these near-term headwinds, we continue to believe AT&T is well positioned to drive improving free cash flow driven by (1) margins expansion; (2) stable capital spending; (3) Project Agile benefits; (4) less EIP working capital headwinds; and (5) DirecTV synergies,” McCormack added.
The analyst noted that the above factors would help AT&T reach its stated goal of $20 billion of free cash flow in 2020, easing any dividend payout concerns, and support the robust 4.9 percent yield.
At time of writing, shares of AT&T were up 0.19 percent to $39.35.
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