Earnings Preview: AT&T to Ring Up Higher Profit

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Time was, telecommunications giant AT&T (T) was one of the most important earnings reports of the season. While times have changed, investors can still get a pretty good sense of where the U.S. economy is headed from AT&T's quarterly report, slated for Thursday ahead of the opening bell.Analysts surveyed by Thomson Reuters project AT&T to post earnings of 51 cents a share, up from 45 cents a year ago. Full-year earnings per share is seen at $2.12. For the first quarter, analysts forecast AT&T to earn 54 cents. AT&T also pays a dividend of $1.68 per year, good for a yield of 6.6%

Investors Looking For Subscriber Gains

In addition to honing-in on AT&T's revenue and earnings guidance for the quarters and year ahead, in the most recent quarter institutional investors want to see continued revenue and subscriber gains in AT&T's consumer wireless and broadband units -- increases that will be needed to offset likely, continued revenue declines in the land-line division.

And the above, in nutshell, is the essence of AT&T's transformation: The company has successfully changed itself from an old-world, land-line, local and long-distance telephone call provider (28 million subscribers), to a cell phone giant (81.6 million subscribers) that's also a formidable broadband player (13.5 million consumer subscribers).

And of course, a seminal action that ended -- once-and-for-all -- the notion of the "stodgy AT&T" was the company's June 2007 achievement as exclusive U.S. carrier of the iPhone, Apple's (AAPL) transformational smart phone. As of the end of the second quarter the company had more than 9 million iPhone customers.

Looking Past IPhone Subsidies

What's more, institutional investors are able to look past AT&T's heavy subsidies for the iPhone because, in the increasingly-mobile digital age, the key is revenue generating units, i.e. "subscribers": Today's mobile phone subscriber could be tomorrow's subscriber to a mobile mini-computer, when the technology becomes available (for a higher fee, of course). Look for AT&T to announce that it added 1 million mobile service subscribers in the fourth quarter.

On the downside, in the past two quarters, AT&T has drawn criticism for not doing more to improve the coverage of its wireless network. Competitor Verizon's (VZ) network is more expansive in the contiguous 48 states, but that does not blot out the fact that AT&T is winning in the mobile metric "demo" that matters: It has the cell phone of choice among young adults.

Concerning AT&T's stock price, the stock has been in a choppy uptrend for about one year, rising from about $21 in March 2009 to about $29 in early 2010, before pulling back to around $25. In short, AT&T stock shows a company in the process of modifying its business model.

AT&T shares will probably sell-off about $1 or so after Thursday's likely in-line earnings report, as short-term investors rotate out of the stock. According to my analysis, a day or so later would be a good time to scoop-up shares: AT&T is well-positioned for the increasingly mobile decade ahead.

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Disclosure: Lazzaro has no positions in stocks, but does own shares in two Pimco Bond Funds: PHDAX and PYMAX.
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