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The AT&T Rally And What You Need To Know

Summary

In an April 3 article, I outlined 3 imperative go-forward AT&T metrics to watch.

These items are likely to provide a far better picture of recent acquisition and integration success than earnings headlines.

Read on for a post 1Q 2016 recap and analysis.

On April 3, Seeking Alpha editors published my initial article about AT&T (NYSE:T). This is a follow-on update.

Over the past 7 months, T's shares have rallied hard, rising from $31 to $39. It's taking a breather at 39 bucks. I contend this makes it especially important to understand and assess the underlying drivers.

Having 1Q 2016 earnings in our hip pocket, this article double backs to 3 go-forward indicators I outlined previously:

  • Consolidated financial results versus pre-merger AT&T/DirecTV "bolt-on" earnings and cash flow
  • Debt management

Armed with post-earnings data, it's time to review and grade the results.

"Bolt-On" Earnings and Cash Flow

In my first article, I explained the importance of viewing AT&T's results through the right lens. Of course, straight year-over-year comps should exhibit strong gains: the company purchased DirecTV and two Mexican wireless carriers, Iusacell and NexTel Mexico. All that business wasn't part of 1Q 2015 results.

No, the acid test is how current AT&T results compare versus the quarters preceding the acquisition; combining AT&T and DirecTV numbers.

The following table, copied from the April 3 article, shows independent AT&T and DirecTV results for the six-month period immediately prior to the deal closing.

Combining the results ("bolt-on") provides a baseline.

Ultimately, should not the newly-combined AT&T/DirecTV do better than the old stand-alone entities? AT&T's management promised $1.5 billion in synergies. This excludes any incremental contribution from Iusacell and NexTel Mexico. That's okay. Comparatively, these Mexican wireless carriers are relatively small and require considerable integration work before material positive results should be expected.

So with 1Q 2016 actuals in the books, let's look at the record:

In addition to GAAP, management provided investors adjusted P/L figures, excluding merger integration expense. These "operating" results are shown below:

Analysis

1Q 2016 revenue came in a little light versus the average pre-merger combo figures. However, if we add 4Q 2015 revenues to the current quarter, the six-month total is $82.6 billion. This compared acceptably with the pre-merger top line combo. It appears AT&T has successfully maintained, though not grown, the top line.

Management's touted operating expense will decline as post-merger synergies kick in. Typically, integration cost, business inefficiencies, and corporate culture play tug-of-war with early results.

Nonetheless, we find AT&T's regular operating expenses (less merger integration costs) have come down materially versus the pre-merger run rate. The...


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