I Don't Think These Cell Carriers Have Peaked
John is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
After a really nice run up through the summer and into the fall, it appears that most cell carriers have peaked. Does this mean that they are now going to turn bearish for this last part of the year? Maybe not! There are a couple factors to consider with the year coming to an end. Apple subsidies are lower this time around as well as the season for buying is just about to begin. We already know that these stocks have been popular because of dividend prices all along, but they still may have some bounce in them!
David Goldman wrote an article earlier in the year about Verizon’s (NYSE: VZ) relationship to Apple (NASDAQ: AAPL) as it started to sell the iPhone. In that article he wrote:
“Since Apple's iPhone debuted on Verizon's network in February 2011, Verizon's "EBITDA service margin" -- a closely watched metric that carriers use to measure their core profit as a percentage of their sales -- has tumbled.”
This has been a real thorn in the carrier’s side. EBITDA gradually fell as iPhone sales increased. The margin was at 46.4% and fell to 42.2% by the end of 2011. If that is not bad enough, AT&T (NYSE: T) saw its stumble from 37.6% to 27.7%. Subsidies continued to impede margins for all the carriers.
Oppenheimer Holdings reiterated its Outperform rating on Verizon Communications, and raised its price target from $50.00 to $52.00. The reason for this rise in price is because Verizon and the other carriers are not spending a large portion of revenue subsidizing the iPhone 5 this time around. This is a key to all the carriers making more money this last quarter. Slapping new tariffs on smartphone buyers is a plan of both Verizon and AT&T. but do they have a choice? Stifel Nicolaus analyst Christopher King writes:
“The Cupertino, Calif. Company, (Apple) is aware of its power, costing carriers $425 per handset in subsidies. Couple that high cost with the early sale of the device and carrier margins for the last half of 2012 will be slimmer than the iPhone 5.”
Sprint (NYSE: S) told analysts that the iPhone will not add to its bottom line until about 2015 because the subsidy is just too much. The iPhone subsidy could be as much as 60 percent higher than subsidies for Android smartphones.
With the best season for carriers coming, some analysts are not entirely bullish on the stocks. AT&T was evaluated by a number of analysts at the beginning of September Here are a number of ratings in early September from analysts:
- Analysts at Nomura reiterated a “buy” rating on shares of AT&T
- Analysts at Deutsche Bank reiterated a “hold” rating
- Analysts at Macquarie reiterated an “underperform” rating on shares of AT&T
Here we have three different analysts with three different ratings within a two week period. SO what does an investor think? With the push for the new season underway, AT&T set a sales record with iPhone 5, making it the fastest-selling iPhone the company has ever offered. Customers ordered more iPhones from AT&T than any previous model, both on its first day of preorders and over the weekend. This will help AT&T even if it has to wait months before real profits come in.
So even though iPhone subsidies may be steep for carriers, they are finding ways to reduce those subsidies, or pass costs on to consumers. With the reduce payments to Apple and the strong sales that comes with this time of year, carriers like Verizon and AT&T, and possible Sprint may see a healthy rebound in revenue growth and margins this holiday season.
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