Why Nomura is more optimistic on AT&T Inc. (T) than Verizon Communications Inc. (VZ)

Nomura sees multiple positives in AT&T Inc. (NYSE:T), which is why it has initiated coverage of the carrier with a Buy rating and 12-month price target of $39.

Among other things, Nomura sees compelling synergies for AT&T from the acquisition of DirecTV (NASDAQ:DTV). For example, Nomura notes that DirecTV will improve AT&T’s video business, making it the leading U.S. video provider covering 26 million households. Nomura acknowledges the rise of over-the-top (OTT) video services and its threat to conventional television. However, the firm believes that the impact from OTT video will be slow-grinding, thus unlikely to catch up or materially affect AT in a negative way any time soon.

Additionally, Nomura cited that the acquisition of DirecTV would lead to at least $2.5 billion in costs benefits for AT&T by 2018 with more to come.  Besides cost synergies, Nomura believes that DirecTV would boost AT&T’s free cash flow, thus allowing for dividend hikes.

Nomura is also positive AT&T Inc. (NYSE:T)’s other asset acquisitions in Mexico. AT&T took hold of Nextel and also acquired Iusacell to expand footprint in Mexico. Nomura is of the view that these Mexico purchases could be accretive to AT&T’s financial results by 2017. Therefore, Nomura estimates that AT&T Inc. (NYSE:T) could post EPS of $2.94 in 2017 up from $2.66 that it predicts for 2015.

Nomura is cautiously optimistic about the future of Verizon, thus initiative the carrier with a Neutral rating and 12-month price target of $47.

Nomura is impressed by Verizon’s robust mobile network and strong executions. However, the firm doesn’t see a clear picture to Verizon’s growth levers beyond fiscal 2016, which is why it has decided to sit on the fence as far as recommending the stock goes.

Although Verizon has been candid about its EPS growth expectations in 2016, saying that earnings will remain flat as 2015, its profitability beyond 2016 remains cloudy. For example, Nomura is concerned about the ability of Verizon’s mobile video service Go90 to steal subscribers from Netflix, Inc. (NASDAQ:NFLX) and Alphabet Inc (NASDAQ:GOOGL)’s YouTube.

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