If money were water, providers of telecommunications gear and
services might all be building arks.
A November announcement fromAT&T (
) opened the gates to a spending flood of near-biblical
proportions among telecom service providers.
AT&T's Project Velocity IP committed $14 billion within
three years, spread over wireless and wireline broadband network
improvements, with $8 billion funneled into its 4G wireless
The project is expected to boost AT&T's overall capital
expenditures to $22 billion for each of the next three years, up
from $19.7 billion in 2012.
"This is a major commitment to invest in 21st century
communications infrastructure for the United States and bring
high-speed Internet connectivity -- 4G LTE mobile and wireline IP
broadband -- to millions more Americans," AT&T CEO Randall
Stephenson said in a statement. "We have the opportunity to
improve AT&T's revenue growth and cost structure for years to
In December, Deutsche Telekom followed suit with a $39
billion, three-year spending plan. Much of that cash flow is
slated for its merging T-Mobile USA andMetroPCS Communications (
Not to be outdone, the world's largest mobile operator by
revenue and subscribers,China Mobile (
), on March 14 outlined an aggressive next-generation wireless
It plans to pour $6.7 billion into rolling out a latest
generation network this year. The blueprint includes expanding
its number of base stations for that network to 200,000 in 13
cities by the end of this year, up from 20,000 at the end of
China Mobile's 4G wireless investments are just one corner of
its $30 billion spending budget for 2013, a 52% increase over
What is triggering all this spending now? Global demand for
high-speed Internet services from increasingly mobile consumers
living their lives through data-hungry smartphones and tablets.
The catch-basin for dollars spent on that infrastructure buildout
is the telecom gear industry.
"On a global basis, it's a healthy time for the industry,"
said IHS analyst Jagdish Rebello. "The carriers are guiding the
capex spending for a couple of years out."
Group Rises, Leaders Base
Collectively, the 36 stocks in IBD's telecom infrastructure
industry group are up 10% so far this year. The group on Friday
ranked No. 36 out of
197 industries tracked by IBD
, up from No. 125.
But stock behaviors within the group vary widely.
), far and away the largest company in the group with a market
capitalization of more than $41 billion, is up 25% year-to-date
through Thursday and trades just below 13.
The second largest firm isAlcatel-Lucent (
), valued at $3.3 billion, with shares down 4% this year, trading
well below 2.
The group includes makers of equipment for wireless and
wireline communications firms, including mobile carriers and
satellite operators. But lately a lot of the growth has been is
in wireless infrastructure to support the booming market for
In major markets like the U.S., the race is on for mobile
operators to build out their coverage footprint for a
fourth-generation, or 4G, wireless standard called LTE, short for
"long-term evolution." China's homegrown variant is called TD-LTE
or time-division long-term evolution. (Networks in the U.S. and
Europe use frequency division technologies.)
Meanwhile, data consumption continues to outpace voice calls
on mobile devices, taxing the capacity of wireless networks.
Adding capacity to existing networks provides follow-on business
for telecom infrastructure firms.
Consumers are demanding faster networks to surf the Web,
download music and games and watch videos online via smartphones
such asApple 's (AAPL) iPhone and handsets based onGoogle 's
(GOOG) Android system.
In terms of relative stock price appreciation and EPS growth,
the top infrastructure performers includeMasTec (MTZ) (up 17% for
the year through Thursday),Neustar (NSR) (up 8%) andNumerex
(NMRX) (up 10%).
The mild gains for both Numerex and Neustar are due to the
fact that both have been building bases since the middle of the
first quarter. Measured in 12-month gains, Numerex is up 36%,
Neustar 22%. Ericsson has one of this year's best earnings growth
outlooks in the group, up 359%. It has just begun to form a
possible handle on what is potentially a 22-month base.
MasTec is a construction services company providing skilled
labor and engineering expertise for wireless, wireline and
satellite communications projects. Its expertise also extends to
oil and gas pipelines, wind and solar farms, electricity
transmission, and water and sewer projects.
Neustar got its start by offering services that allowed
telecom customers to keep the same phone numbers when they
changed service providers. It since has branched out, delivering
real-time information and analysis to the Internet, telecom,
information services, financial services, retail, media and
Numerex sells machine-to-machine wireless communications
systems for businesses. These are most-often used in fleet
vehicle tracking, various security applications and by utilities
using smart meter technologies.
Lighting The LTE Fire
Global spending on wireless communications infrastructure is
forecast to gain 4.7% this year to $44.7 billion, according to
market researcher IHS. Annual spending growth is seen slowing to
2% for 2014 and 2015.
High-speed, high-capacity LTE infrastructure is a different
story. LTE projects will make up 53% of telecom infrastructure
spending this year, up from just 19% last year, IHS says. The
research firm sees LTE's share expanding to 87% of telecom gear
spending in 2016.
The LTE infrastructure build-out is still in its early stages.
LTE is expected to become the largest category in infrastructure
spending this year, overtaking spending on 3.5G networks, which
had a five-year run on top, IHS says. LTE supports much faster
data speeds than 3G and 3.5G systems.
"4G LTE is just getting going," said Mark McKechnie, an
analyst with Evercore Partners. "It's really strong in the U.S.,
Japan and Korea."
McKechnie argues a "rolling thunder thesis," which sees the
technology spreading to China and Europe in a three-year
The Wireless Land Grab
In general, telecom capital expenditures are bouncing back
after several years of frugality, says Infonetics Research
analyst Stephane Teral. Infrastructure investments in North
America and Asia drove growth last year, he says.
The move to 4G wireless networks has sparked a land grab for
market share among telecom equipment vendors, led by Ericsson and
China's Huawei. Second-tier players in the market include
Alcatel-Lucent, Nokia Siemens Networks and China's ZTE.
Ericsson boasts being the world's largest supplier of LTE
equipment, with twice as many shipments as its largest
Both Ericsson and Huawei have aggressively priced their
hardware to gain market share. The strategy is to take lower
margins on the hardware-intensive build-out of the networks in
hopes of getting higher-margin business in adding capacity later
on, says Andrew Lange, an analyst with Morningstar. The early,
capacity build-out phase is more profitable because it has a
larger software and services component, he says.
Building out LTE capacity will require close collaboration
between the carriers and equipment providers, Rebello says.
Network planning and deployment will become increasingly complex
and likely will involve smaller cells and spectrum reuse
technologies, he says.
What comes next? The next generation beyond LTE has been
dubbed LTE Advanced. Russian carrier Yota has nabbed the lead in
rolling out the first LTE Advanced network -- despite the fact
that there are no consumer devices yet using the technology. But
Yota expects those to hit the market later this year, Rebello
says, with LTE Advanced rollouts and spending spreading in