Another Strong Quarter for "Ma Bell"

AT&T, Inc.

Q2 Rev Est.:  $31.02 Bil

Q2 EPS Est.:  $0.58

Another great quarter will wrap up for AT&T in the coming week.  On average, analysts are expecting Q2 revenue to come in at $30.88 Bil with earnings of $0.58 per share.  As I was formulating the revenue estimate of $31.02 Bil, three particular models seemed to be the most predictive:   Deseasonal, Dummy Coding, and Autoregression.  Figure 1, below, summarizes the second-quarter results of the three forms of regression.

Figure 1

Q2 Projection
Model	Prediction
Deasonal	$31,238
Dummy	$31,254
Lagged	$30,572
AVERAGE	$31,022

Figure 2

As is evident from the above chart, it appears that AT&T will finally bust out of the narrow revenue range that has plagued the company for the past 18 months.

Figure 3

Income Statement
For the three months ended June 30, 2010
Total Operating Revenue	$31,022
Operating Expenses:
Cost of Sales	$12,479
SG&A	$7,644
Depr. & Amort.	$4,954
Total Oper. Ex.	$25,077
Operating Income	$5,944
Other Income (Expense):
Interest Expense	$812
Equity Invesments	$196
Other Income (Expenses)	$36
Total Other Income	-$580
Income before Taxes	$5,364
Income Taxes	$1,835
Net Income	$3,530
Less:  NI from NCI	-$81
Net Income Attributable to AT&T	$3,449
Diluted EPS	$0.58

After arriving at $0.58 per share, it appears that my quarter-over-quarter estimates for each line of the income statement are relatively stable.  For example, second-quarter operating income is forecasted to be 19.2% of total revenue, compared to 19.6% last quarter.  While this indicates an expected increase in operating expenses, the ending earnings figure is actually higher than the previous quarter (11.9% of revenue vs. 11.3%).

Despite the forecast for strong revenue and earnings, AT&T’s stock price could easily fall after the announcement on July 22.  Companies must generally exceed expectations in order to experience any immediate price appreciation.  For AT&T, I’m not confident that a 0.004% revenue surprise is enough to bolster increased investment in the stock.  So, here is my Trading Recommendation:  if AT&T is selling for $27 or higher on July 21, then buy puts; on the other hand, if the stock is trading at $25 or lower, buy calls.  The area between $25 and $27 includes too many uncertainties—I do not recommend trading the stock within this range.  

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AT&T Ownership

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