Analysts: Verizon, AT&T will hopefully become more 'rational' in pricing this year

With a somewhat bumpy fourth-quarter reporting season expected for the Tier 1 wireless carriers, analysts at Jefferies are hoping for more "rational" pricing behavior from the large operators in 2015.

"While we still see an unsustainable industry structure, we are hopeful for more rational behavior" this year, Jefferies analysts Mike McCormack, Scott Goldman and Tudor Mustata wrote in a research note. "We see the risk of increased leverage, and consumer credit as the likely levers for behavioral change."

The analysts said key areas to focus on in determining how 2015 will unfold include how aggressive Sprint (NYSE: S) will in pricing, T-Mobile US' (NYSE:TMUS) push to generate free cash flow, and how willing Verizon Wireless (NYSE: VZ) and AT&T Mobility (NYSE: T) will be to forgo subscriber growth in favor of maintaining higher margins and free cash flow.

Last year the carriers engaged in a price war, especially among family plan customers, via a spate of promotions. Financial analysts have worried that such activity is unsustainable in the long term and could drag down earnings and ultimately investment.

In terms of the individual carrier's performance, the analysts said that with AT&T they expect trends at the carrier to larger mirror those in the wider industry, with healthy subscriber growth and weaker margins. The analysts think AT&T will report 720,000 net postpaid subscriber additions in the fourth quarter, which they said is lower than Wall Street's consensus of 815,000 (indeed, Credit Suisse expects AT&T to notch 850,000 postpaid net adds).

"Our focus will be on whether the company can take a more rational approach in 1Q15 amid pressures from both S and TMUS in what is traditionally a slow quarter, helping reduce elevated churn levels," they added.

At T-Mobile, the analysts noted that while the company's pre-announced postpaid net additions of 1.28 million were lower than their own expectations of 1.5 million, the figures still easily beat T-Mobile's own guidance and Wall Street consensus of 1.18 million. "We view management commentary of meeting 4Q EBITDA guidance--despite volumes above guided levels--as a key driver to 2015 estimate revisions" as T-Mobile works to cut costs and score synergies from shutting down MetroPCS' CDMA network.

The Jefferies analysts note Sprint "is making material progress" in reversing its postpaid subscriber losses. However, they said the company's pre-announced results for the fourth quarter imply a loss of 215,000 handset customers, which would be "materially worse" than Wall Street's forecast for 120,000 and Jefferies' expectation of 170,000.

"Given that Sprint was essentially flat (a loss of 2-3k) in December (the month it introduced the aggressive 'Cut Your Bill in Half!' offer), we believe that subscriber trends will continue to see pressure" in the first half of 2015 "as the initial impact of the promotion wears off, and network-related churn issues persist." Sprint is extending that promotion, which offers to cut Verizon and AT&T's customers' bills in half if they switch to Sprint and buy a new phone, through 2015.

Sprint CEO Marcelo Claure said last week that in the fourth quarter the company had close to 1 million net customer additions. Claure added that about 400,000 of those new subscribers were prepaid net adds, but did not say how many postpaid customers Sprint added.

Meanwhile, at Verizon, Jefferies is expecting higher postpaid churn (1.13 percent compared to a prior estimate of 1.05 percent) and weaker subscriber additions (1.78 million compared to 2.02 million before). Credit Suisse said last week it thinks Verizon will have 1.85 million net postpaid adds in the fourth quarter.

"Given the elevated churn, and promotional activity, we lower our ARPA growth expectations to 1.2% (from 1.6%); below consensus of 2.3%," the Jefferies analysts added. Jefferies also thinks Verizon's wireless service margin will dip to 43.1 percent and the analysts are cautious on Verizon's 2015 average revenue per account and margins.

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