UBS downgrades AT&T, cites increased wireless competition and costs related to DirecTV Now

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UBS downgraded AT&T to a neutral rating from buy, citing increasing competition in the wireless market and the costs it’s likely to incur as it launches DirecTV Now in the coming weeks.

UBS reiterated its view that EBITDA growth in mobile is likely to slow due to three factors: diminishing benefits from the shift to equipment installment plans (EIPs), limited upside to savings from lower volumes, and “ramping competitive intensity” in a market where growth from new customers has slowed. Competition heated up again recently as carriers moved aggressively to leverage the launch of the iPhone 7, UBS noted, constraining margins for operators in the second half of 2016. And competition will only increase through the end of the year and beyond.

“While this (iPhone) promotion is about to end, we expect carriers to remain competitive in 4Q and with AT&T’s new OTT product around the corner and new cable MVNO launches in mid-2017, competitive intensity is only picking up,” according to UBS.

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Meanwhile, the nation’s second-largest mobile network operator is preparing to launch DirecTV Now, an ambitious cross-platform video initiative with a heavy emphasis on mobile. The offering will have more than 100 channels, CEO Randall Stephenson said last week, and the content will be zero-rated for the company’s wireless customers.

“The company has the majority of the programming arrangements in place and expects to improve trends in both wireless and video metrics,” UBS analysts wrote. “We expect the cost of deployment of this new bundle and Sunday Ticket accounting to pressure Entertainment profitability in the near term. That said, we continue to expect incremental synergies and ongoing cost-cutting initiatives to improve wireline margins going forward.”

UBS lowered its estimates for AT&T’s earnings per share for 2016 to $2.84, down from $2.93, and lowered EPS estimates for 2017 to $3.02, down from $3.12. The firm said it believes AT&T is on track to end 2016 with $1.5 billion in synergies and to reach its goal of $2.5 billion in synergies next year.

The firm lowered its 12-month price target for AT&T shares to $43 from the prior target of $46. The stock was trading at $40.76 mid-day Wednesday.

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