UBS Telecom Analyst Talks AT&T's Q2

AT&T Inc. T reported second-quarter results Tuesday that came in as expected, but digging beyond the headline numbers reveals some concerning metrics, UBS telecom and media analyst John Hodulik said.

The Analyst

Hodulik discussed AT&T's earnings as a guest on CNBC's "Squawk Box" segment Wednesday morning.

The Thesis

AT&T's "light" earnings beat in the second quarter was accompanied by accelerated revenue declines that contributed to a sales shortfall versus the Street's expectations, and the communication segment saw a 6-percent decline in EBITDA, Hodulik said. (See the analyst's track record here.)

While the Time Warner business' performance in the quarter was solid, the outlook isn't as attractive, the analyst said. As it stands today, HBO spends around $2 billion annually on content, but under AT&T's umbrella that figure should move higher, he said. 

This raises the pressing question of how AT&T can afford to pay billions per year to support the HBO business when the core telecom business is showing shrinking organic revenue, CNBC's Melissa Lee said. Hodulik replied that AT&T still generates substantial cash flow, and an incremental $2 billion is "doable" for a company of its size. 

The wireless segment remains the largest business unit, so it may take precedence for investors over the new entertainment business, the UBS analyst said. The company also stands to benefit if merger talks between T-Mobile Us Inc TMUS and Sprint Corp S fail, Hodulik said, as neither company has sufficient resources to invest in 5G alone — but AT&T does.

Price Action

AT&T shares were falling 3 percent to $30.73 at the time of publication Wednesday morning. 

Related Links:

14 Stocks To Watch For July 25, 2018

A Peek Into The Markets: US Stock Futures Flat Ahead Of Earnings

Photo by Luismt94/Wikimedia.