AT&T to lose 300,000 phone subscribers in Q4, but margins will rise, Wells Fargo predicts

Wells Fargo Securities adjusted its estimates for AT&T (NYSE: T) ahead of the carrier's fourth quarter earnings report, predicting the carrier will post fewer postpaid adds than previously expected due to less aggressive promotions than in recent years, but higher EBITDA margins.

The firm said it expects AT&T to report 800,000 net tablet subscriber adds during the quarter but a net loss of 300,000 phone subscribers, totaling 500,000 overall net adds. But fewer net adds will mean EBITDA margins of 43.8 percent, according to Wells Fargo, up from the 42.7 percent previously expected.

"We estimate wireless service revenue of $15.1B, up 0.4% y/y, and equipment revenue of $4.6B, down - 4.5% y/y. Our EBITDA margin estimate is now 43.8% vs. 42.7% prior," Wells Fargo wrote in a research note. "We estimate postpay upgrade rate of 8.75%, down y/y from 11.3%, as equipment installment plans (EIP) are suppressing upgrades overall."

Added the firm: "Said another way, customers on EIP plans prefer to hold onto their devices longer."

The firm also noted AT&T's recent launch of unlimited plans for DirecTV subscribers, predicting that the offering will prove compelling to consumers. And it expects the carrier to launch other features and promotions in the wake of its acquisition of the satellite TV provider.

Indeed, CEO Randall Stephenson said in December that AT&T would announce new capabilities, products and pricing this month -- a clear indication that the new unlimited plans aren't the only thing the carrier has up its sleeve entering the new year. Stephenson outlined "a really premium content package with our premium wireless asset," adding that such a service will include movies, live sports and TV shows from DirecTV.

Wells Fargo maintained its "outperform" rating for AT&T, pegging a valuation range of $40 to $42.

"AT&T is one of the largest and most diversified carriers," the firm concluded. "Combine with high dividend yield, it makes T the 'core' large-cap holding in the sector, in our view."

Related articles:
AT&T's Stephenson teases carrier's plans to leverage DirecTV content for upcoming mobile video service
AT&T resurrects unlimited data offering at $100/month, but only for its DirecTV subscribers
AT&T a 'fundamentally different company' now that DirecTV acquisition has closed
Analysts skeptical on AT&T/DirecTV bundling, think OTT mobile video offer could be coming

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