AT&T Inc. Earnings: Will Price Wars Crush Growth?

Fears of a devastating price war could spell trouble for AT&T. Find out more here.

Apr 18, 2014 at 2:21PM

On Tuesday, AT&T (NYSE:T) will release its quarterly report, and investors have started feeling a bit more secure about the prospects for the telecom giant even as competitive pressures heat up in the industry. Despite new threats from smaller rivals Sprint (NYSE:S) and T-Mobile US (NASDAQ:TMUS) -- and even though Verizon (NYSE:VZ) has taken full control of its Verizon Wireless division to preserve its perceived lead in the wireless-network arena -- AT&T has experience with price wars and knows how to make the most of business lines even if they start to see overall growth decay.

For years, AT&T and Verizon have had a stranglehold on the U.S. wireless market, charging high prices for their services yet experiencing almost no viable competition. With T-Mobile now pushing hard with new pricing plans, the prospects for a more serious price war are escalating. Moreover, speculation over a possible merger between Sprint and T-Mobile has raised concerns, given that such a combination would create a third major carrier to add to the mix. Let's take an early look at what's been happening with AT&T over the past quarter and what we're likely to see in its report.

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Stats on AT&T

Analyst EPS Estimate

$0.69

Change From Year-Ago EPS

7.8%

Revenue Estimate

$32.33 billion

Change From Year-Ago Revenue

3.1%

Earnings Beats in Past 4 Quarters

2

Source: Yahoo! Finance

Can AT&T earnings grow faster?
Analysts have been just the tiniest bit pessimistic in recent months about the long-term prospects for AT&T earnings, holding near-term estimates steady but cutting full-year 2015 projections by 1% to 1.5%. The stock has rebounded from its recent lows, climbing 9% since mid-January.

AT&T's fourth-quarter earnings report shows the positives and negatives for the telecom giant recently. Revenue rose by 2% as AT&T added more than 2 million new subscribers to its wireless and high-speed broadband service during the quarter, leading to a 20% jump in adjusted earnings. AT&T continued to get huge interest from smartphone users, with smartphones making up 93% of the company's phone sales in its nonprepaid segment. That led to strong wireless-segment performance, where segment revenue climbed 5% and wireless-data sales soared by 17%.

But the big-picture problem that AT&T and rival Verizon face is the emergence of T-Mobile as a serious contender in the U.S. market. T-Mobile has introduced numerous promotions to try to boost its subscriber counts, and many of those promotions have targeted AT&T specifically. That has forced AT&T to respond with margin-slicing promotions of its own that could lead to a repeat of the bad experience AT&T had with long-distance telephone service decades ago, where competition eventually led to unlimited-calling plans that replaced high-margin usage-based pricing. For now, Verizon has largely stayed out of the fight, but if it responds, the resulting cascade in pricing could hurt the entire industry.

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One perplexing question for investors is where AT&T will find growth. The company said that it wouldn't pursue an acquisition of Vodafone in the near future, closing off one potential avenue that seemed to open when Verizon chose simply to buy its Verizon Wireless asset rather than taking over Vodafone entirely. Yet with the U.S. market near saturation, looking internationally seems like the most obvious direction for AT&T to go in order to capture new high-growth opportunities.

AT&T also has an opportunity in broadband Internet to use its presence inside millions of homes to provide higher-level premium service to customers. Yet there, AT&T runs into competition not just from fellow telecoms but also from tech giants seeking to expand their businesses and deliver the infrastructure needed for their users to have the best possible experience with their products. If tech companies end up building their own networks, it could present new threats to AT&T.

In the AT&T earnings report, watch to see how well the company handles all the challenges it's dealing with right now. The key will be for AT&T not to lose its strategic focus and to convince shareholders that it can keep producing value while also finding new avenues for growth.

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Dan Caplinger has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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