JPMorgan: Buy AT&T, But Think Twice About Verizon

In a report published Wednesday, JPMorgan analyst Philip Cusick upgraded the rating on AT&T Inc. T from Neutral to Overweight, while raising the price target from $35 to $40. The EPS estimate for 2016 has been raised from $2.50 to $2.80 to reflect the DirecTV DTV and Mexican acquisitions. The DirecTV deal is expected to close on June 30. "While we believe the days of high growth at DTV are past, we expect total US video customers at T/DTV to be stable while costs fall overall," analyst Philip Cusick said. AT&T significantly reduced prices in 1Q14 for existing customers, in view of the threat from T-Mobile US Inc TMUS. With around 62 percent of smartphone customers being on those reduced price plans, phone subs could decline gradually and tablets could grow, alleviating the pressure on ARPU. "In 2Q we raise ARPU and now look for flat to slightly higher service revenue q/q, and expect the 2nd derivative of revenue growth to flip to positive, which could improve sentiment," the report said. "Overall though our upgrade is based on a cost cutting thesis including DTV synergies, lower Opex needed to support slowing Capex, and Project Agile, which should start to create savings in 2016 that accelerate to a $1.5-2b run-rate in 2017," Cusick added. In another report, analyst Philip Cusick downgraded Verizon Communications Inc. VZ from Overweight to Neutral, while maintaining a price target of $55. The analyst expects the company to generate robust 2Q15 results. "Verizon's wireless business continues to lead the industry with 103m postpaid subscribers, and management remains bullish on the long-term outlook for its wireless business, despite high levels of competition and service revenue headwinds. Near term, we look for 1m postpaid net adds in 2Q15 and we model solid total revenue growth of 7.6% y/y in 2Q15, despite a decline in service revenue of 0.8% y/y," analyst Philip Cusick mentioned. Verizon has achieved growth in its consumer revenues through the FIOS business. The company generated 4.0 percent y/y consumer revenue growth in 1Q15 and Cusick forecasts 3.9 percent y/y growth in 2Q15. However, the mid-single digit declines in the SME, global enterprise and global wholesale businesses are unlikely to change in the near term. "Furthermore, once Verizon closes the sale of its wireline asset divestitures in CA, TX and FL, total and consumer wireline revenue and EBITDA will be lower on a reported basis and make for tougher y/y comparisons," the report added. Although Verizon gets the benefit of a significant advertising technology platform from the acquisition of AOL, Inc. AOL, it could take a few years for any substantial revenue impact to materialize. Cusick believes that AT&T shares offer more upside potential, saying, "We do not see any significant near term catalyst for the [Verizon] stock and at this point prefer AT&T to Verizon due to AT&T's dividend yield of 5.4% vs Verizon's 4.5% and potential cost structure improvements."