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AT&T income tax expense went down 37% in Q1 2011 compared to the year before, from $2.863B to $1,802B. Verizon also saved $1B on a drop in income tax provision from $1,622B to $617B, 62%. At AT&T, the tax benefit was nearly a third of earnings and more than the entire growth in net. The same is true at Verizon. Neither reporters nor several wall street analysts referenced the tax savings, which were so large they change the story. 

     I'm not suggesting anything improper or special favors for either company. Each took $20B in losses on their pension funds, which could shelter a heck of a lot of income. This is just one more reason to tread lightly based on quarterly and even single year results.

Verizon carries $24B of deferred income taxes on their balance sheet and AT&T $22B. Those numbers dwarf their annual bills. There's also $billions in reported capital spending that doesn't fit any common sense notion of what capital investment really is. There's capitalized interest and software required for running the daily business, and many other items I haven't found. Steve Levy of Lehman Brothers used to try to calculate network investment but the companies wouldn't even release to Wall Street the needed information.

    Craig Moffett, the most visible bear, puts Verizon's stock price in an interesting perspective. "Verizon looks to us to be priced for perfection. These results are good, and Wireline offers reason for optimism, but they're not good enough to warrant Verizon's current valuation."  Other senior analysts take the opposite point of view. I don't pick stocks, but am confident enough about telco prospects to say they certainly shouldn't be priced on an assumption of rapid growth.

     Earnings off by a penny or three don't mean much when factors like this are ten times the size.