The second-largest U.S. mobile service provider, AT&T Inc. (T), fears potential setbacks following the expiry of four labor contracts this weekend.
About 40,000 of its workers, represented by Communications Workers of America, could call the strike should AT&T fail to negotiate the new labor contract with them. Talks are still on at both sides related to issues such as healthcare costs, job security, benefits and work rules.
The union employees are from the company’s wireline division in the East, Midwest, West and legacy. The company’s wireline segment is currently struggling with persistent losses in access lines that are weighing on its revenues and margins. AT&T’s local phone business is contracting due to competitive pressure from voice-over-Internet protocol (VoIP) service providers and aggressive triple-play (voice, data, video) offerings by the cable companies to the consumer market.
Nevertheless, management expects positive business trends to continue going forward with wireline revenue returning to growth and stable margins this year. The growth would be fueled by strong business revenue and more specifically, improving strategic services.
In addition, healthy growth from its U-verse video (U-verse TV and bundled satellite) services is helping AT&T to counter increasing competition in the business. The company expanded its U-verse network deployment to 30 million customers last year.
We believe the expansion of U-verse services will continue to boost data revenue and ARPU (average monthly revenue per user) in the wireline segment. The company is taking advantage of the growing managed hosting and cloud services business.
The proposed strike by AT&T workers will be the second major strike in the U.S. telecommunication space within a year. And this would put AT&T in the same situation as Verizon Communications (VZ) was in August last year. Two labor unions from Verizons’ wireline segment went on strike as the company failed to negotiate the new labor contract with them. However, the workers returned to the work later in the month despite being able to come to terms with Verizon.
Approximately 55% of AT&T’s 256,000 employees are represented by CWA. Six contracts covering 70,000 workers in the wirleine business are scheduled to expire this year.
We will carefully watch how the company handles these issues and how labor unions react. Hence, we are maintaining our long-term Neutral recommendation on AT&T. The company retains the Zacks # 3 Rank (Hold)for the short term (1–3 months).


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