The Zacks Analyst Blog Highlights: AT&T, Verizon Communications, Apple, Google and 3M Company

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Jan 24, 2012, 09:30 ET

CHICAGO, Jan. 24, 2012 /PRNewswire/ -- Zacks.com announces the list of stocks featured in the Analyst Blog. Every day the Zacks Equity Research analysts discuss the latest news and events impacting stocks and the financial markets. Stocks recently featured in the blog include AT&T Inc. (NYSE: T), Verizon Communications Inc. (NYSE: VZ), Apple Inc. (Nasdaq: AAPL), Google Inc. (Nasdaq: GOOG) and 3M Company Inc. (NYSE: MMM).

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Here are highlights from Monday's Analyst Blog:

Earnings Preview: AT&T

The second-largest U.S. mobile service provider AT&T Inc. (NYSE: T) is slated to release its fourth quarter and fiscal 2011 earnings on January 26, before the opening bell. The current Zacks Consensus Estimates for the fourth quarter and fiscal 2011 are 45 cents and $2.24, respectively, representing substantial year-over-year decline of 18.62% and 2.15%.

Looking at surprises, AT&T had average positive surprise of 1.77% in the past four quarters.

The company did not release any financial forecast for the fourth quarter and fiscal 2011 at its third quarter conference call.

Third Quarter Flashback

In the third quarter, AT&T's adjusted earnings matched the Zacks Consensus Estimate but improved substantially from the year-ago earnings. Revenue, however, slipped from the year-ago level and also missed the Zacks Consensus Estimate.

Wireless revenue improved on the heels of robust mobile broadband growth, higher smartphone sales and an upswing in branded computing subscribers. Wireline revenue, which was impacted by declining traditional voice access lines, was a spoiler. On the other side, wireline U-verse TV and bundled satellite subscribers remained healthy during the third quarter on continued high-speed Internet attach rates.

Agreement of Analysts

Estimates have been trending downward for both the fourth quarter and fiscal 2011 over the last 7 and 30 days. For the fourth quarter, 3 and 8 analysts out of 25 analysts made downward revisions in the last 7 and 30 days, respectively. For fiscal 2011, out of the 29 analysts, respective 2 and 7 made downward revisions in the last 7 and 30 days.

None of the analysts made positive revisions for the fourth quarter and fiscal 2011.

The analysts have turned negative following the unsuccessful outcome of the T-Mobile merger story. Last month, AT&T dropped its $39 billion bid to purchase T-Mobile, announced in March last year. The company agreed to pay T-Mobile $3 billion in cash and $1 billion for spectrum access for dropping the deal.

As a result, AT&T is expected to incur charges of around $4 billion in the fourth quarter due to the failure of the proposed takeover, which will negatively hurt its profits.

With the termination of the deal, AT&T's hopes of becoming the largest U.S. wireless carrier, dethroning Verizon Communications Inc. (NYSE: VZ) are shattered. Now, the company is in need for additional airwaves to expand its advanced high-speed 4G services given its exponential growth in mobile broadband traffic.

Already criticized for dropped calls and poor network coverage, AT&T will face more constraints in its capacity deployment compared to Verizon, hurting subscriber growth.

Coming to the most popular device - Apple Inc.'s (Nasdaq: AAPL) iPhone, AT&T saw an astounding demand for the new iPhone 4S and activated more than one million iPhone 4S during the first six days of launch (October 7). This marks the best order ever received by AT&T for the device. We expect the new iPhone 4S, lower pricing on iPhone 4, new Google Inc.'s (Nasdaq: GOOG) Android handsets as well as new Long-Term Evolution ("LTE") handsets would drive smartphone sales upward, making it the best ever fourth quarter. Despite this, high marketing or subsidy cost associated with the iPhone is restricting its bottom line.

AT&T is currently paying a hefty subsidy of approximately $300 per phone to Apple, which is dilutive to the company's earnings. Hence, the analysts are concerned regarding the failure of the T-Mobile transaction and lofty subsidies, which will hurt AT&T profitability. Further, they will be watching the movements of AT&T for acquiring additional airwaves, which can help the company to increase its capacity networks.

Magnitude — Consensus Estimate Trend

The magnitude of the fourth quarter estimate revisions remained unchanged at 45 cents over the last 7 days but was down by 2 cents over the last 30 days.

The Zacks Consensus Estimate of $2.24 for fiscal 2011 was revised downward from $2.25 in the last 7 days and $2.27 in the last 30 days.

Our Recommendation

We believe AT&T will generate strong growth on the back of healthy iPhone and smartphone sales coupled with growth in tablets and connected devices that will accelerate subscriber gains while reducing churn rate. The launch of 4G LTE networks, expanding U-verse services, and entry into cloud computing and hotel WiFi businesses would boost the company's profitability.

In addition, AT&T was the first wireless carrier to provide mobile social gaming options on its smartphones and tablets, which differentiates and makes it superior from other operators. However, persistent declines in traditional voice access lines; aggressive pricing plans by rivals and the loss of iPhone exclusivity in February last year keep us cautious on the stock.

We are currently maintaining our long-term Neutral recommendation on AT&T. The stock retains a Zacks #3 (Hold) Rank for the short term (1-3 months).

Earnings Preview: 3M Company

3M Company Inc. (NYSE: MMM) is slated to release its fourth-quarter 2011 earnings result on Thursday, January 26, 2011. The current Zacks Consensus Estimate for fourth-quarter earnings per share (EPS) is $1.31, representing an annualized growth of 3.15%. For full-year 2011, the Zacks Consensus Estimate is $5.93, representing an annualized growth of 3.18%.

3M's earnings were below the Zacks Consensus Estimate in the last quarter while the number was in line with the estimate in the second quarter of 2011. Moreover, in the first quarter of 2011 and fourth quarter 2010, earnings per share were above and in line with estimates, respectively. The company outperformed the Zacks Consensus Estimate with an average negative surprise of 0.02%.

Agreement of Estimate Revisions

In the last 30 days, of the analysts providing estimates on the stock, none changed their estimates for the fourth quarter or for full-year 2011 and 2012.

Magnitude of Estimate Revisions

In the last 7 days, earnings estimate for the fourth quarter decreased from $1.32 to $1.31, it dropped from $5.94 to $5.93 in 2011 and for 2012 from $6.30 to $6.29.

The company's estimate for fourth quarter, 30 days ago, was $1.32. From last 30 days, estimate for 2011 remain unchanged at $5.93 and for 2012 decreased from $6.34 to $6.29.

Our Take

The company expects to see a continued slow growth till the end of 2011, as weakening economies continues to challenge business growth. Lower demand from the customers will be mitigated by the company through fully fledged cost management and a regulated operation in developed economies. Developing markets are seen as the prime benefactors.

3M is globally recognized for its innovations, which is supported by some of its well-known brands, such as Nexcare, Post-it, Scotch, Scotch-Brite, and Scotchgard leading the market. We believe that continued capital expenditure with new product launches should bolster its prospects across most end markets.

However, the company's growth objectives are largely dependent on timing and market acceptance of its new product offerings, including its ability to continually renew its pipeline of new offerings and bring those to the market at acceptable price points.

Further, the results have been impacted by worldwide economic and capital market conditions. Negative consumer sentiment is affecting the retail store traffic. On the corporate side, lower employment levels are negatively reducing office supply purchases in most companies.

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