Earnings Preview: AT&T's 2Q may be hurt by economy

OVERVIEW: The round of second-quarter earnings reports from telecommunications companies kicks off with the biggest of the bunch. Investors will be looking closely for the effect of the economic slowdown on AT&T's earnings and likely applying their analysis to the stocks of other carriers.

Historically, phone companies hold up well in economic downturns, much like utility stocks. That held true as recently as the first quarter, but analysts are starting to think that the second quarter will be different. Some believe that AT&T's landline losses have sped up due to competition from cable companies and cell phones. Of course, AT&T has probably continued to grow its own wireless business.

BY THE NUMBERS: Analysts polled by Thomson Financial on average expect earnings, excluding items, of 76 cents per share on $31.2 billion in revenue.

ANALYST TAKE: At the start of the quarter, analysts were expecting earnings closer to 80 cents per share, but trimmed their estimates after AT&T's first-quarter earnings report.

David Barden of Banc of America Securities expects that AT&T will report its phone lines shrank 8.6 percent compared with a year ago, a faster pace than before. But he warns that AT&T's results may not be directly applicable to other phone companies, since the weakness in the economy isn't evenly spread across the country.

Craig Moffett at Bernstein Research believes fears about the economy and competition are now priced into phone-company stocks, and AT&T's in particular.

"We may now be at a point when near term manifestations of these long-term worries may well be smaller than expected," he wrote in a research report.

WHAT'S AHEAD: Apple's new iPhone model went on sale on July 11, just after the end of the quarter. AT&T is the exclusive U.S. carrier for Apple's phone, and is subsidizing the new model heavily. It expects the subsidies to cost it 10 cents to 12 cents per share this year and the next. It possible that consumers delayed getting new phones in the second quarter in anticipation of the release of the iPhone 3G.

STOCK PERFORMANCE: AT&T's shares lost 12 percent during the quarter to finish at $33.69. They hit a two-year low of $31.34 on Thursday.