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Earnings Watch: AT&T stock surges as cooperation with activist and profit beat outweighs revenue miss

Shares of AT&T Inc. shot higher in active trading Monday, after third-quarter profit beat expectations and the disclosure that it was collaborating with activist investor Elliott Management on maximizing shareholder value, which was enough for investors to brush off a revenue miss.

AT&T’s results were the best of the earnings-reporting bunch on Monday, which included results from Walgreens Boots Alliance Inc. WBA, +0.69% and Restaurant Brands International Inc. QSR, -3.78% , which is the parent of the Burger King and Popeyes restaurant chains.

AT&T’s stock T, +4.28% rallied 4.3% to $38.49, enough to pace the gainers among the company’s large-capitalization peers. Trading volume swelled to over 62.2 million shares, more than double the full-day average of 29.1 million shares.

The communication giant unveiled a three-year capital allocation plan, in conjunction with its earnings report, in which it said includes a plan for dividend growth, share repurchases, assets sales and paying down debt. The company said while the objectives disclosed Monday have been central to its plans “for many months,” it has benefited from talks with shareholders such as Elliott Management.

“I’ve found our engagement with Elliott to be constructive and helpful, and I look forward to continuing those conversations,” said AT&T Chief Executive and Chairman Randall Stephenson. “These are smart people who very much appreciate the opportunity we have to create tremendous shareholder value.”

In September, Elliott Management, the hedge fund founded by billionaire Paul Singer, said it owned a $3.2 billion stake in AT&T. Elliott had sent a letter to AT&T’s board of directors saying it had a plan that could boost share prices by more than 65% in less than two years.

Don’t miss: AT&T’s stock jumps after activist investor sees 65% rally potential to record high.

“As we move forward in the coming months, the board and I look forward to continue our close collaboration with Elliott on strategy, operational initiatives in our portfolio and to see through the value-enhancing steps that I’ve laid out today,” Stephenson said in a post-earnings conference call with analysts, according to a FactSet transcript.

Meanwhile, AT&T’s earnings report were mixed, but the bad wasn’t so bad as to act as a drag on the stock.

Net income declined to $3.70 billion, or 50 cents a share, from $4.72 billion, or 65 cents a share, in the same period last year.

Excluding nonrecurring items, such as a noncash loss on benefit plans, merger-amortization and integration costs, adjusted earnings per share rose to 94 cents from 90 cents, beating the FactSet consensus estimate of 93 cents.

Revenue fell 2.5% to $44.59 billion, below the FactSet consensus of $45.11 billion. Communications revenue, which includes mobility and entertainment, fell 1.7% to $35.4 billion to miss the FactSet consensus of $35.75 billion, while WarnerMedia revenue, which includes HBO and Turner, declined 4.4% to $7.8 billion to miss expectations of $8.18 billion.

Within entertainment, video connections fell to 21.6 million from 25.2 million a year ago, while the net number of premium TV video subscribers declined by 1.2 million and of AT&T Now subscribers fell by 195,000.

The company expects 2020 adjusted EPS of $3.60 to $3.70, which compared with a recently revised FactSet consensus of $3.59.

AT&T’s stock has rallied 35% year to date, while the SPDR Communication Services Select Sector exchange-traded fund XLC, +0.93% has advanced 23% and the S&P 500 index SPX, +0.56% has climbed 21%.

Walgreens’ earnings beat not good enough to support the stock

Walgreens reported fiscal fourth-quarter net income that fell to $677.0 million, or 75 cents per share, from $1.51 billion, or $1.55 per share, last year, to reflect higher charges as the drugstore chain accelerated its Transformation Cost Management Program. Excluding one-time items, adjusted EPS fell 3.7% to $1.43, but topped the FactSet consensus for $1.41.

Walgreens raised its annual cost savings target to more than $1.8 billion by fiscal 2022, versus a previous target of $1.5 billion.

Sales increased 1.5% to $34.0 billion, above the FactSet consensus of $33.9 billion, as U.S. retail pharmacy sales grew 2.1% to $26.0 billion while international sales declined 6.3% to $2.7 billion.

For fiscal 2020, the company said an expected 17% effective tax rate will reduce adjusted EPS growth by about 2 percentage points. Walgreens also said it anticipates buying back $1.75 billion worth of its stock, less than half the $3.8 billion it spent on repurchases in fiscal 2019.

The stock rose 0.7%, erasing an earlier loss of as much as 0.9%.

Restaurant Brands earnings disappointment overshadows return of Popeyes chicken sandwich

Restaurant Brands reported third-quarter net income that rose to $351 million, or 75 cents a share, in the third quarter, from $240 million, or 53 cents a share. Adjusted per-share earnings came to 72 cents, matching the FactSet consensus.

Revenue grew 6.0% to $1.458 billion, just below the $1.464 billion FactSet consensus. Same-restaurant sales fell 1.4% at Tim Horton, rose 4.8% at Burger King and were up 9.7% at Popeyes. That compares with the FactSet consensus for same-restaurant sales for Tim Horton of a 0.7% rise, for Burger King of a 4.0% increase and for Popeyes of 5.9% growth.

The stock dropped 3.7%, which was the biggest one-day post-earnings decline since the company’s third-quarter 2016 report in October of that year.

The revenue miss, which was the eighth miss in the past 10 quarters, overshadowed the return of the Popeyes chicken sandwich this coming Sunday. It was the launch of Popeyes’ sandwich that sparked a social-media war between Popeyes, Chick-fil-A and Wendy’s Co. WEN, -1.88% back in August.

Read more: Chicken sandwich wars: Popeyes, Chick-fil-A and Wendy’s are waging an all-out food fight on Twitter.

EPS growth estimates have improved, but it’s still a recession

With 40% of the S&P 500 having reported through Monday morning, the outlook for the quarter has improved slightly, but an extension of the earnings recession still looks likely.

Also read: 5 prominent U.S. companies are most at fault for the earnings recession.

See related: China casts a long shadow over stocks as earnings season opens this week.

The aggregate blended EPS growth rate for the third quarter, which includes both actual results and estimates for companies that have yet to report, is currently negative 3.8%, compared with an estimate of negative 4.9% just before the start of earnings reporting season.

The S&P 500 appears headed for a third-straight quarter of year-over-year EPS declines, which would be the longest such streak in three years.