By Dan Gallagher
By limiting upgrades for smartphones and showing improved "discipline" on price subsidies, U.S. wireless carriers may lift their profits but also usher in lower sales of popular devices like the iPhone.
That was the gist of a pair of reports issued Friday by Credit Suisse. The broker upgraded the shares of AT&T Inc. (T) and Verizon Communications Inc. (VZ) to overweight ratings, citing "signs across the industry of growing discipline around pricing and subsidies." Carriers pay handset makers a subsidy to sell their devices.
"If this discipline holds, we believe there is upside to margins and earnings growth for all carriers," he wrote. "We believe investors should be overweight telecom into this trend."
AT&T shares were up more than 2% to $33.85, while Verizon shares rose 1.7% to $41.24, in afternoon trading.
Carriers' returns have been under pressure, Chaplin noted, from the rapid growth of smartphones, as the devices lead to sharp increases in the use of their data networks, necessitating additional capital expenditures. He also noted that subsidy costs have risen sharply, growing by 34% in 2011 alone.
"We now expect upgrade volumes and device subsidies to decline after years of steady growth, driving a sharp improvement in margins," he wrote.
That could lead to lower shipments of smartphones that could impact the bottom lines of companies like Apple Inc. (AAPL), the maker of the iPhone. In a related note, Credit Suisse hardware analyst Kulbinder Garcha trimmed his iPhone shipment targets for the next two quarters by 12% to a combined total of 55 million units for the June and September periods.
"Clearly even in the near term, if the U.S. carriers implement discipline on their smartphone upgrade policy or associate extra costs linked to that, we believe it will have an impact on Apple, considering 38% of total iPhone volumes came from the North America region in the past six months, with the company having a dominant 43% market share in the region over that period," he wrote.
Garcha maintained his outperform rating on Apple's stock, however, noting that the shares "remain inexpensive" at around 9.6 times estimated earnings for the next year. Shares of Apple were down fractionally in afternoon trading on Friday.
While tighter upgrade policies may also impact sales of Android phones running on Google Inc.'s (GOOG) operating system, Garcha noted that the average subsidies for those devices are more than 20% lower than what carriers pay for the iPhone.
He also trimmed his earnings estimates for Qualcomm (QCOM), the chip maker that supplies many of the processors used in smartphones and tablets--and draws royalties on overall device sales. Garcha maintained his outperform rating and $75 price target on the stock, however.
"Fundamentally, we believe that while slower U.S. growth may create a drag, Qualcomm has exposure to robust smartphone growth seen in emerging markets," he wrote.
-Dan Gallagher; 415-439-6400; AskNewswires@dowjones.com