AT&T; Stock Slips on News Firm Expects Profit to Drop

News that AT&T;’s second-quarter profit will be lower than a year ago--and below analysts’ expectations--sent the price of the nation’s most widely held stock sliding Wednesday.

The announcement by American Telephone & Telegraph Co. was the first time since the 1984 breakup of the former Bell System that the nation’s largest phone company has given advance warning of a lower profit.

The company blamed the expected earnings slide in the quarter ending Saturday partly on lower-than-expected sales of telephone equipment.

AT&T; would not predict how much the drop would be. It said it would release second-quarter results in mid-July.

Analysts said the news was surprising, but they did not doubt AT&T;’s forecast that profit for the entire year would be at a record high.

“All this suggests to me is a temporary margin squeeze, with a reversal over the next six months,” said Stuart Crane, who follows AT&T; for the investment firm Gruntal & Co.

“The fundamentals of AT&T; are strong,” he said. “I don’t agree with throwing out the stock.”

In nationwide New York Stock Exchange trading, AT&T; shares closed at $39.125, down $2.125 from Tuesday’s close. Earlier, the shares were down as much as $3.50. About 11.5 million shares changed hands Wednesday, nearly nine times the average daily volume.

AT&T; estimates that it has 2.5 million shareholders, more than any other U.S. company. About 40% of the shares are held by individuals.

AT&T; spokesman Dick Gray said results from April and May indicate unexpectedly low sales to U.S. businesses of equipment such as electronic switchboards and private phone systems.

Sales of products to telephone operating companies, such as switching equipment, also have been less than anticipated, Gray said, as have been sales to the federal government.

AT&T; also said sales in its computer division have lagged.

The company said the lower equipment sales were because of market conditions and a sluggish economy.

AT&T; does not disclose how much of its profit it derives from individual business segments.

Meanwhile, heavy demand for AT&T;’s new Universal Card has caused expenses associated with processing applications for the credit card to rise, the company said.

AT&T; said demand for the card was twice the level expected. The card, which combines a phone charge card with a MasterCard or Visa, was introduced in March.

The company said the expected decline in second-quarter earnings will make it more difficult to meet its objective of 10% to 12% profit growth this year. But it stands by its earlier projection that net income for all 1990 will break last year’s record high. In 1989, AT&T; earned $2.7 billion, or $2.50 a share, on revenue of $36 billion.

For several years, AT&T; has been cutting costs by reducing employment levels.

In April, AT&T; reached agreement with its unions to offer early retirement to about 34,000 workers. The program follows one offered last year to managers, under which about 12,000 chose early retirement. AT&T; has about 315,000 employees.

AT&T; also plans to continue to move workers into sales and marketing jobs to increase revenue, Gray said.

George Kelly, an analyst at Morgan Stanley & Co., attributed the slowdown in sales of corporate phone systems partly to the nationwide commercial real estate slump. As fewer companies move to new quarters, fewer phone systems are sold, he said.

AT&T; also faces increased competition in the office phone market from Rolm, which is owned by International Business Machines Corp., and Siemens AG of West Germany, Kelly said.

In the market for central-office switches, the nerve center of phone companies, AT&T; has seen increased competition from LM Ericsson of Sweden, Kelly said.

Gruntal’s Crane said demand for central-office switches has softened as the regional phone operating companies have completed a cycle of buying new equipment. But he predicted an upturn in two to three years as AT&T; comes out with new optical-based central switches. The company is several years ahead of competitors in this advanced technology, he said.

In last year’s second quarter, AT&T; earned $699 million, or 65 cents a share, on revenue of $9.26 billion.

In light of AT&T;’s statement, Kelly estimated earnings this quarter would be 63 cents a share, while Crane put the figure at 62 cents. Gregory Sawers, an analyst at Sanford C. Bernstein & Co., estimated 60 cents.