AT&T shares fall $3 on lower profit outlook Analysts skeptical of 5-year plan to bolster earnings

March 04, 1997|By Timothy J. Mullaney | Timothy J. Mullaney,SUN STAFF

AT&T Corp. shares fell $3 yesterday after the company's new president said first-quarter and yearly profits will fall short of expectations, reflecting $8 billion to $9 billion of investment in AT&T's business and a push to cut operating expenses by $2.6 billion a year.

AT&T fell to $36.875 as more than 13.3 million shares traded. It was the most active stock on the New York Stock Exchange and one of the few blue-chip laggards on a day when the Dow Jones industrial average rose 41 points. "We did some great things in 1996, but we didn't deliver the profitability and performance both you and we expect," AT&T President John Walter told an analysts' conference at the long-distance giant's New Jersey headquarters.

Walter said profit in the current quarter will stay weak, and is likely to be nearly 10 percent lower than the 76 cents a share AT&T earned in the final quarter of last year. Even that was considerably less than the 90 cents a share AT&T earned in the first quarter of 1996.

"This is a growth business," said Walter, who said demand for long-distance connections is growing six times faster than the U.S. population. But, he added, "the growth dynamics got away from us, and part of that is our own fault."

The $2.6 billion in annual expense cuts can be accomplished within two years without any layoffs beyond AT&T's previously announced plan to cut 17,000 jobs over the next several years, the company said. Most of the cuts under that plan have been offset by hiring elsewhere in AT&T.

The big investments are to build up new or fast-growing businesses in wireless communication, the Internet, and entering the local phone service market from which AT&T has been banned since 1984. Thanks to last year's federal telecommunications reform law, it can now enter the local business and compete with the Baby Bell companies it spun off in 1984.

The new investments could shave 75 cents to $1 per share off AT&T's earnings this year, Walter said, which otherwise would have been between $3.45 and $3.75 a share.

Last year, he said, AT&T's core business made $4.06 a share, but capital investments cut the final profits to $3.47 a share. Analysts had been predicting that AT&T would earn about $3.60 a share in 1997.

But Walter and AT&T Chairman Robert E. Allen, whom Walter is slated to replace next year, promised that the spending will pay off in the medium term.

Both said the company is committed to getting earnings up to between $5 and $6 a share within five years.

"These investments will dilute earnings in the near term, but they will also build a growth path," Allen vowed.

Analysts were skeptical of the five-year forecast.

"They didn't back it up with meat," said Forrester Research analyst David Goodtree. "There were a lot of questions and unfulfilling answers."

Merrill Lynch analyst Daniel Reingold said AT&T's forecast assumed profits will grow up to 19 percent annually at a time when AT&T will be facing stiff new competition in long-distance as local phone companies enter that market.

"Even Coca-Cola doesn't grow at that rate," Reingold said.

Pub Date: 3/04/97

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