UBS downgrades AT&T, citing aggressive promotions

Published Wed, Sep 28 201611:36 AM EDT

UBS' John Hodulik, a top-rated analyst, downgraded AT & T to neutral from buy Wednesday, reducing his 12-month price target by 7 percent to $43 from $46 on expectations of lower earnings given aggressive competition in the space. "We are lowering our EPS estimates by 3 percent to reflect the increased competitive intensity in wireless and incremental costs associated with AT & T's DTV Now rollout," wrote Hodulik in a research note. Since 2009, Hodulik's recommendations have returned an average of 15 percent with a 78 percent success rate, according to TipRanks . That performance makes him a top 250 analyst on all of Wall Street, according to the site. Here are the three main reasons why Hodulik predicts earnings growth is set to slow down: "Diminishing benefits from the shift to installment plans." "Limited upside to savings from lower volumes." "Ramping competitive intensity." Hodulik points to AT & T's recent promotion of the new iPhone at a cost of just $300 as how his theory is starting to play out, with competitive pricing becoming the new norm to attract potential customers at the expense of margins. "While this promotion is about to end, we expect carriers to remain competitive in 4Q," said Hodulik, describing that "competitive intensity is only picking up." This year, shares of AT & T are up 19 percent compared with a gain of 6 percent for the S & P 500, as the search for yield has led many investors to buy the stock. Source: FactSet At the current levels, AT & T trades at 13.7 times forward earnings, a 16 percent discount to the S & P, according to Hodulik's estimates. The stock has a dividend yield of 4.7 percent. "While valuation is in line with its historical average, we believe the risk-reward is balanced at current levels. We expect shares to remain sideways as the deteriorating operating environment in wireline and wireless weighs on results," he said. The 12-month price target of $43 set by UBS, implies a move of only about 4 percent from where AT & T shares closed Tuesday.

An AT&T employee assists a customer with a Samsung smartphone inside one of the company's stores in New York.

Michael Nagle | Bloomberg | Getty Images

"We are lowering our EPS estimates by 3 percent to reflect the increased competitive intensity in wireless and incremental costs associated with AT&T's DTV Now rollout," wrote Hodulik in a research note.

Since 2009, Hodulik's recommendations have returned an average of 15 percent with a 78 percent success rate, according to TipRanks. That performance makes him a top 250 analyst on all of Wall Street, according to the site.

Here are the three main reasons why Hodulik predicts earnings growth is set to slow down: