This Day On The Street
Continue to site
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

iPhone 5 Woes Create a Verizon, AT&T Buying Opportunity: Analysts

NEW YORK ( TheStreet) -- Hidden amid the daily rumblings about Apple's (AAPL - Get Report) share price is a twist to one of the biggest investing stories of 2012: the fourth quarter earnings of Verizon (VZ - Get Report) and AT&T (T - Get Report).

As the telecom giants prepare to report, investors will get a full glimpse of how subsidized iPhone sales impact overall profit margins. While analysts are increasingly seeing reason for subsidies to cause earnings to fall short of expectations, they also argue an earnings miss by Verizon or AT&T could create a long-term buying opportunity.

Understanding the dynamics at the heart of Verizon and AT&T's much anticipated earnings gets to some of the key drivers of telecom sector investments. Apple, as it turns out, is a major factor that often goes underappreciated in the daily speculation on whether the iPhone and iPad maker is overvalued or undervalued.

The key issue for investors to consider is whether they are impressed by the strong overall subscriber and earnings growth posted by the likes of Verizon and AT&T, or whether they're fearful of falling wireless profit margins every time Apple rolls out a new iPhone.

Jonathan Schildkraut, an analyst with Evercore Partners says that while subscriber additions at Verizon and AT&T will push overall wireless margins lower for the fourth quarter, it could represent a buying opportunity for investors.

Schildkraut highlights that a big surge in subsidized fourth quarter iPhone subscriber additions could clear the air for both carriers in 2013. Currently, Schildkraut expects Verizon and AT&T to sell nearly 10 million smartphones for the quarter, with iPhones accounting for 75% to 80% of handset sales.

"Similar to what we are expecting with [Verizon], while the stock could trade off at the print, we believe that a massive pull forward of smartphone upgrades into 4Q could set [AT&T] up for a strong 1Q and 2013... [We] believe that weakness resulting from this margin pressure could lead to a buying opportunity," writes Schildkraut, in a Jan. 15 note to clients assessing telecom earnings.

The argument is borne out in the numbers and gives investors reason to decide, in fourth quarter earnings, whether they favor overall wireless subscriber and revenue growth, or quarter-to-quarter improvements on profit margins.

According to Schildkraut's calculations, Verizon will add 2.3 million total retail smartphone subscribers, representing an over 50% year-over-year surge that will also drive overall wireless revenue nearly 10% higher to $19.1 billion for the fourth quarter. Margins, on the other hand, are estimated to fall over 15% versus the third quarter as subsidized iPhone sales cut wireless margins from an estimated 46.7% to 41.7%.

At AT&T, a similar story of wireless revenue growth and margin pressure is expected to play out in the fourth quarter.

The key question is whether investors should care. Schildkraut argues investors should accumulate shares were Verizon or AT&T to miss earnings. He rates both carriers 'equal-weight' and gives them price targets of $47 a share and $36.50, respectively. [Verizon and AT&T also pay near 5% dividend yields]
1 of 2

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Real Money

More than 30 investing pros with skin in the game give you actionable insight and investment ideas.

Product Features:
  • Access to Jim Cramer's daily blog
  • Intraday commentary and news
  • Real-time trading forums
Only $49.95
14-Days Free
14-Days Free
PCS $11.84 0.00%
AAPL $93.74 0.00%
GOOG $693.01 0.00%
S $3.43 0.00%
T $38.82 0.00%


Chart of I:DJI
DOW 17,773.64 -57.12 -0.32%
S&P 500 2,065.30 -10.51 -0.51%
NASDAQ 4,775.3580 -29.9330 -0.62%

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs