NEW YORK (TheStreet) -- AT&T reports earnings on Thursday, but investors will be focused primarily on how the DirecTV (DTV - Get Report) acquisition will cut costs and change the telecom company's business strategy.
The mean analyst estimate has AT&T reporting slightly higher earnings of 63 cents a share, compared with 62 cents a year ago, and essentially flat revenue at $33 million.
Even so, AT&T's stock is up 4% since its first-quarter earnings announcement in anticipation of the DirecTV merger.
Federal Communications Commissioner Tom Wheeler indicated Tuesday night that the agency will approve AT&T's DirecTV merger.
Investors should look for indications of cost savings above the $2.5 billion originally suggested by AT&T by the third year as a combined company, and details about how AT&T can enhance sales of both companies by combining forces.
Telecom has experienced pervasive M&A because growth in wireless and landline -- 63% of AT&T's sales -- is hard to come by as consumers move away from old phones connected to wires, and cell phone companies like T-Mobile TMUS and Sprint S undercut prices.
The acquisition of a satellite provider like DirecTV is AT&T's best hope for growth at a time when acquisitions of wireless telecoms has run its course through government restrictions and previous consolidation.
The acquisition makes AT&T a stock pick of some analysts because DirecTV allows it to cut costs once the two merge. In addition, the merged company's larger size will afford it the opportunity to negotiate cheaper prices from entertainment providers like ESPN. It will give AT&T the chance to cut personnel from support and back office staff and allow the company to sell more products every time it rolls a truck to a consumer's home.
Colby Synesael, analyst at Cowen, chose AT&T among its top two picks in the wireless sector based on an expectation of $165 million in costs savings in 2015, $765 million in 2016 and $2.5 billion in 2019 following the company's merger with DirecTV, he said in a note last week. Cowen has an outperform rating on the company and a price target of $40 per share.
Oppenheimer's Timothy Horan called AT&T his favorite large carrier pick in a note on Friday. He predicted at least $2.5 billion in cost cuts by the third year of DirecTV ownership. "We expect the stock to trade up upon the close of the acquisition of DirecTV," Horan wrote. "We expect the Street will begin to include revenue synergies, and expense synergies could also improve versus management's guidance." Oppenheimer has an outperform rating on AT&T.
AT&T engaged in price wars in wireless handsets less than peers, and though this might mean fewer new subscribers than Verizon (VZ - Get Report) and T-Mobile (TMUS - Get Report), it also suggests the company's committed to more profitable customers. The move also helps to stabilize pricing throughout the sector. "The carrier seems to have adopted a muted marketing approach during the quarter, providing support to its expressed view that it would not necessarily go after the very price sensitive, marginal customers and would instead look to retain subscribers that are more focused on what it believes is a high quality network experience," Amir Rozwadowski, analyst at Barclays, noted last week. Barclays has a $39 per share price target on AT&T and an overweight rating.
Jennifer Fritzsche, senior analyst at Wells Fargo, forecast that AT&T would lose 10,000 subscription handset customers but add 510,000 tablet customers, less than analyst estimates of 570,000 total new subscription customers, but she agreed the strategy was sound and good for the industry. She has an overweight rating on the company.