By Akanksha Rana and Munsif Vengattil
(Reuters) - When AT&T Inc (NYSE:T) and Verizon Communications Inc (NYSE:VZ) report their first-quarter results this week, investors will look for clarity on capital spending and margin pressures as wireless carriers shell out billions to upgrade their networks to 5G.
Analysts have been bullish about the pandemic helping the telecom sector, but some have flagged concerns over the rising costs of 5G deployments. Some carriers have paid huge sums in a recent spectrum auction, limiting their ability to spend on infrastructure.
In February, AT&T, Verizon and T-Mobile US (NASDAQ:TMUS) won $78 billion in bids in the government's auction of C-Band spectrum, which is seen as the most likely short-term source of available spectrum for next-generation 5G networks.
"We expect upward pressure on Big 3 capex because of the enormous spectrum investments they've made in 2020 and 2021," Bernstein analyst Peter Supino said.
Graphic: Capital expenditure at U.S. telecoms set to rise in 2021 - https://graphics.reuters.com/VERIZON-RESULTS/azgvoxjqlpd/chart.png
THE CONTEXT
Wall Street on average expects AT&T to incur $18.54 billion in capital expenditure this year, an increase of 18% over last year, while Verizon's spending is expected to rise about 10% to nearly $20 billion.
The onset of the 5G era has left customers exploring various available options from among the big three carriers that continue to invest in the rapidly evolving technology, thereby intensifying competition.
Brokerage JP Morgan expects margins at the big three carriers to contract in the second quarter as economies reopen and companies burn cash on aggressive promotions to snap up customers.
Graphic: S&P 500 has outperformed AT&T, Verizon in the past 12 months S&P 500 has outperformed AT&T, Verizon in the past 12 months - https://tmsnrt.rs/32ze36t
THE FUNDAMENTALS
* Dallas, Texas-based AT&T is expected to report a 1% decrease in revenue to $42.36 billion from $42.78 billion a year ago, according to Refinitiv data.
On the other hand, analysts expect New York-based Verizon expected to report a 2.7% rise in revenue to $32.46 billion from $31.61 billion a year ago.
* Analysts' mean estimate for AT&T's first-quarter earnings is 78 cents per share, where as the mean estimate for Verizon's earnings is $1.29 per share.
WALL STREET SENTIMENT
* The current analysts' average rating on AT&T's shares is "hold" and the breakdown of recommendations is 8 "strong buy" or "buy," 18 "hold" and 6 "sell" or "strong sell."
The current average analyst rating on the shares of Verizon is "hold" and out of the 30 analysts covering the stock, 9 rate it "strong buy" or "buy," 21 "hold" and no "sell" or "strong sell."
QUARTER ENDING STARMINESMARTE REFINITIV ACTUAL BEAT, SURPRISE %
STIMATE® IBES ESTIMATE MET,
MISSED
AT&T
Dec. 31 2020 0.72 0.73 0.75 Beat 3.1
Sep. 30 2020 0.76 0.76 0.76 Met 0.1
Jun. 30 2020 0.8 0.79 0.83 Beat 4.7
Mar. 31 2020 0.83 0.84 0.84 Met -0.4
Verizon
Dec. 31 2020 1.17 1.17 1.21 Beat 3.4
Sep. 30 2020 1.22 1.22 1.25 Beat 2.8
Jun. 30 2020 1.15 1.15 1.18 Beat 2.7
Mar. 31 2020 1.22 1.22 1.26 Beat 3