July 17, 2012 / 1:56 PM / in 5 years

AT&T, Verizon shares on tear ahead of 2nd-quarter earnings

NEW YORK (Reuters) - Don’t expect much of a pop from shares of Verizon Communications Inc (VZ.N) and AT&T Inc (T.N), even if the two companies surpass analysts’ second-quarter expectations.

That’s because shares in the top U.S. telephone companies have already risen sharply this year due to their high dividend yields and earnings and revenue stability amid an uncertain global economy and low U.S. Treasury interest rates.

Verizon’s stock has risen almost 13 percent so far this year while AT&T shares are up about 17 percent.

“They’re big. They’re safe and they offer dividend yields,” said Pivotal Research analyst Steve Sweeney, explaining the stronger-than-usual demand for the telecom shares.

Verizon’s dividend yield of 4.4 percent and AT&T’s 4.9 percent yield have become increasingly attractive to risk-averse investors looking for alternatives to 10-year treasury notes carrying an interest rate that had fallen to 1.45 percent from 1.88 percent at the end of last year.

“That gap, the extra yield you’re getting by buying AT&T and Verizon, is a near 20-year high,” said Deutsche Bank analyst Brett Feldman, who has a “hold” rating on the stocks and views them as “fully valued.”

“SUMMER OF LOVE”

Verizon currently trades at about 16 times analysts’ earnings-per-share forward estimates, while AT&T trades at a multiple of 14. The average trading multiple for S&P 500 companies is 12.2, according to Thomson Reuters StarMine Data.

With macroeconomic uncertainty -- particularly in Europe -- continuing to be a major factor, analysts say there is no clear reason why the telephone companies’ shares should decline. But they also say it is unlikely the stocks will rise much further.

“I don’t think we’ll see the potential for much multiple expansion from here,” said Pivotal’s Sweeney, who has “hold” ratings on both Verizon and AT&T.

While Evercore analyst Jonathan Schildkraut views Verizon shares as “expensive,” he added that, “with limited changes in the broader macro picture, and what we expect to be a steady quarter, the summer of love for Verizon is likely to continue.”

SOLID Q2 EXPECTED

Investors expect solid growth in the second quarter from AT&T and Verizon as they work on reining in costs and pushing for revenue growth from wireless data services.

On June 28 U.S. market leader Verizon Wireless -- Verizon’s venture with Vodafone Group Plc (VOD.L) -- kicked off a new way of billing customers aimed at convincing them to connect other devices to its network beyond phones.

AT&T is expected to follow with a similar move to so-called shared-data plans.

Investors expect the changes to eventually boost revenue but they will not be a factor in the second quarter.

When Verizon reports results on July 19, Verizon Wireless is expected to lead U.S. growth with almost 666,000 new subscribers, according to seven analysts. Their estimates range from 440,00 to 878,000.

AT&T, the No. 2 U.S. mobile provider, is seen adding about 233,000 subscribers, according to six analysts. AT&T is scheduled to report results July 24.

Both companies are likely to add customers from smaller rivals such as No. 3 U.S. mobile service provider Sprint Nextel Corp (S.N), which is expected to lose over 203,000 subscribers in the quarter, according to five analysts.

“One of the reasons investors feel comfortable right now with AT&T and Verizon is that the near term for earnings looks firm,” said Deutsche Bank’s Feldman.

Last year the two operators felt heavy pressure on wireless profit margins as record sales of iPhones pushed up costs. Verizon Wireless, AT&T and Sprint all pay hefty subsidies to Apple Inc (AAPL.O) for each iPhone they sell, and they use big device discounts to lure customers to two-year contracts.

But this year, profit margins at AT&T and Verizon are expected to improve as both companies have taken steps to slow the rate at which their customers upgrade to new smartphones.

“Because of the discipline they’ve shown there, investors expect to see better margins this year,” Feldman said. “Q2 will likely confirm that near term operating trends are showing solid performance of revenue and margins.”

Analysts estimate Verizon Wireless’ service profit margin based on earnings before interest, taxes, depreciation and amortization will rise to roughly 47 percent or higher in the second quarter from 46.3 percent in the first quarter and 42.2 percent in the fourth quarter, when the iPhone was launched.

AT&T’s profit margin is expected to rise to about 42 percent in the second quarter from 41.6 percent in the first quarter and 28.7 percent in the fourth quarter, when it incurred its heaviest expenses from the iPhone.

Verizon’s earnings per share is expected to increase by 12 percent to 64 cents on a revenue gain of 3 percent to $28.59 billion, according to Thomson Reuters I/B/E/S

Analysts expect AT&T to report an earnings increase of about 5 percent to 63 cents, and revenue is estimated rising about 1 percent to $31.786 billion.

AT&T shares rose 0.6 percent at $35.63 early Tuesday on New York Stock Exchange. The stock ended 2011 at $30.24.

Verizon was up 0.4 percent at $45.46. The stock ended 2011 at $40.12.

Additional reporting by Chris Reese; editing by Peter Lauria and Jeffrey Benkoe

Our Standards:The Thomson Reuters Trust Principles.
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