2 Differing Analyst Views After AT&T Investor Day

Merrill Lynch

Merrill Lynch maintained a Neutral rating and $35 price target. According to the metrics that AT&T gave, the Next plan take rate should be around 50% just above the Merrill Lynch estimate of 48%. The “bring your own device” plan looks to add 400,000, and at the same time this could put pressure on equipment revenues, but it would overall benefit the company’s margins. Merrill Lynch forecasts 4.1 million in Next device sales in the third quarter for 2014.

Merrill Lynch said in its report:

We like AT&T’s innovation, but it will take time before we see a meaningful contribution to growth. AT&T has nearly 2M connected car customers, including approximately 500k added in 3Q14. The company expects to reach 10M connected cars in 2017. With 10M customers, we estimate AT&T could generate nearly $1B in annual revenue (wholesale ARPU is low single digit; retail is about $10). The company has 140k Digital Life customers with roughly half coming over the last two quarters. If we assume the company adds approximately 35k/quarter, Digital Life could generate about $200M of annual revenue in 2017. Given the low penetration of home security and automation and AT&T’s nationwide coverage, we think this could be conservative. Management believes.

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Credit Suisse

Credit Suisse maintained an Outperform rating with a $41 price target. The firm believes that the purpose of the AT&T investor and analyst day was to highlight the Digital Life connected-home plan and the Drive program. AT&T also outlined the complexity of developing these markets.

Credit Suisse has a couple estimates that are indicative of its rating of AT&T. The first estimate is that the base business of the connected-car plan could generate more than $500 million in revenue by 2017 — expecting that it services more than 10 million vehicles in 2017. For Digital Life, the estimate is that the company could add more than $500 million in revenue.

Credit Suisse adjusted its fiscal year 2014 earnings per share to $2.65 from its previous level of $2.62. Thomson Reuters has a consensus estimate of $2.60 in earnings per share for the same period.

The stock has generally traded within a range of $30 to $38 for the past two years. At the same time, the AT&T dividend has not seen any massive change, despite remaining the highest Dow Jones Industrial Average dividend with a yield close to 5.2%. The stock closed at $35.24 on Tuesday and was trading down $0.20 at $35.04 on Wednesday shortly after the open. AT&T has a consensus price target of $36.10 and a 52-week trading range of $31.74 to $37.48. Its market cap is $182 billion.

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