Good results but still little respect


What exactly do the four companies that increasingly dominate American communications have to do to earn some respect? That’s a fair question after investors’ lukewarm reaction to the strong fourth quarter results and updated guidance.

Verizon Communications (VZ) easily beat Wall Street consensus expectations with fourth-quarter earnings up 8.3% on a 4.8% revenue increase. And the midpoint of direction of $5.475 per share for the 2022 earnings forecast topped an estimate of $5.36, fueled by expected wireless revenue growth of 9-10%.

Comcast Corporation (CMCSA) increased its quarterly dividend by 8% after beating both revenue (up 9.5%) and earnings per share (up 37.5%). The broadband giant also increased its free cash flow by 122.6% and increased its share buyback plans for 2022 to $10 billion.

AT&T Inc. (T) is still keeping us in the dark regarding the details of its impending spin-off from Warner Media. But both potential halves of the company beat expectations for the fourth quarter, with Warner’s revenue up 15.4%, wireless sales up 5.1% and consumer broadband up 5.4%.

Excluding asset sales, revenue growth of 4.1% in the fourth quarter was the highest in several years. Free cash flow for the full year swelled to $26.8 billion. This was 7% ahead of forecast and resulted in a dividend payout ratio of just 56%.

Investor reaction: AT&T shares have fallen about 5% since announcing its results. Verizon has lost a percentage point since its report. And Comcast is still nearly 3% lower year-to-date. T-Mobile United States (TMUS) Fourth quarter results are not expected until February 2.

It is likely that part of the recent decline is simply due to the selling momentum that has extended from 2021. In today’s stock market, day-to-day trading is largely influenced by the action in index ETFs, with decisions driven by an algorithm. And those three stocks are heavily indexed with AT&T member 177, Comcast 169 and Verizon 164, according to Bloomberg intelligence.

But over the past 12 months, the Communications Big 4 — those three stocks plus T-Mobile US — have also significantly underperformed the S&P 500: -7% including dividends versus the S&P 500’s 17.2% gain. And that’s amplified by the fact that the four quartets have a combined market capitalization of $755 million, which isn’t an insignificant part of the S&P 500.

Why the gap? The main reason is a months-old Wall Street narrative repeated over and over again by mainstream media: that competition for US wireless and broadband customers is set to intensify and erode corporate margins.

Wireless and broadband were the Big 4’s biggest growth drivers in 2021. So those fears spurred lower 2022 earnings estimates and therefore prices, even as company numbers and management guidance have been consistently positive.

Bloomberg Intelligence reports that only 12 of the 32 analysts who track AT&T rate the stock as a buy. The tally for Verizon is 10 out of 33 purchases. For Comcast, it’s a little better at 29 out of 37 purchases. And for T-Mobile, it’s 30 out of 37. But collectively, the sentiment isn’t much better. that the 11 buys, 8 holds and 2 sells in effect for DISH Network Corp. (NSDQ:DISH).

Ironically, DISH’s ambitious plan to build a fourth national 5G network is central to the bearish argument. The company spent $7.3 billion on midband spectrum in the last FCC auction. And last April, management signed an agreement to link its network to Amazon.com’s cloud software.

Bears also predicts increased pressure on wireless margins this year due to the expansion of C-band-based offerings, T-Mobile US’s 2.5 Ghz spectrum and cable TV’s small cell rollout. And many expect fiber broadband growth to slow, although customer additions for AT&T, Comcast and Verizon remained robust in the fourth quarter.

Verizon recorded its biggest net customer gain for its Fios service since 2014. AT&T added more than one million fiber broadband users for the fourth consecutive year. And Comcast added 1.3 million net broadband customers, increasing its market share, but at a slower pace than a year ago.

Clearly then, if the bears are right, the numbers are bound to get worse going forward. And the weakest part of this argument is the assumption that DISH will take real market share from the leaders this year.

We’ll learn more about this company’s financial situation and its 5G plans when management releases results in late February. But at this point, it looks like DISH will have to issue a lot more debt to avoid a major cash crisis this year.

Total borrowings are already more than 1.3 times its current market cap, with all maturing by the end of 2029. The satellite TV core unit will almost certainly lose more revenue and subscribers this year . And management’s merger talks with DirecTV are in my view a tacit admission that the company lacks the scale to be a true national competitor.

Telecommunications bears also latched onto recent comments from AT&T CEO Jeff Elfresh that “broader macroeconomic headwinds” could affect growth in the wireless sector. This concern, however, is also likely overstated., given the strong resilience of the industry in 2020. And any negative impact from the economy will also be offset by the adoption of 5G service, a major factor in the pace of Verizon’s estimates for 2021 which should be a driver of growth even stronger in 2022.

Bearish market-level stock prices are the strongest argument against telecom bears. Verizon is selling less than 10 times expected next 12-month earnings, Comcast at 14 times, AT&T at 8 times and T-Mobile US at a third of its summer 2021 high.

It won’t take much good news in 2022 from 5G and broadband growth to beat the lower expectations underlying these prices, offering big gains for patient investors. For the best communications bets, check out the Conrad Utility Investor December feature article”Telecoms: interesting stocks at bearish prices.”

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