It is turning out to be disappointing 2017 for the U.S. telecommunications industry. Cut-throat pricing competition resulting in lower ARPU (average revenue per user) and margins, massive investment for upcoming 5G wireless network and fiber optic buildout resulting in low free cash flow and intense competitive pressure shifted investor's focus toward other growth-oriented industries in an overall bull market in 2017.
Year to date, telecom service provider industry has lost 0.73%. Although the telecom equipment manufacturer industry has gained 12.09%, it is still below the bench-mark S&P 500 index gain of 16.91%.
Will the telecom industry turnaround in 2018? The answer to this question depends on a spate of macro-economic and industry specific factors. Irrespective of a few positives and negatives, the industry's fate will also depends on court verdicts in some major cases.
Upcoming fifth-generation (5G) superfast wireless networks will provide the primary impetus to the telecom industry. Verizon plans to launch next-generation 5G wireless residential broadband services in three-five U.S. markets in 2018. However, a full-phased 5G wireless network will be offered only in 2020. 5G wireless networks will be of utmost importance in the management of exponential growth in Internet-of-Things (IoT). In other words, IoT has the potential of becoming the numero uno factor in driving growth in the space.
Accumulation of dark fiber will bolster telecom operator's cell network density, consequently giving a boost to their mobile backhaul network. The densification of cell network will help carriers install and build 5G network. Adoption of small cells has increased due to the inconvenience of installing large towers in inaccessible areas. Small cells will be used to augment existing 4G LTE and upcoming 5G network and will primarily concentrate on high traffic locations like a business district or a shopping mall.
Internet TV streaming service is gradually gaining market traction in the United States. Of late, the legacy pay-TV industry has been facing stiff competition from online video streaming service providers. The low-cost over-the-top video streaming service has resulted in massive cord cutting that is currently threatening the pay-TV business model. Internet TV streaming has emerged as a strong alternative to counter this competitive threat.
President Donald Trump's proposed policy changes have made the overall economic outlook fairly bullish. The two pro-growth agendas of Trump, namely, significant cut in corporate tax and deregulation are major catalysts to the U.S. economy. We believe the U.S. telecommunications industry is going to be a major beneficiary.
The proposal to reduce corporate tax rate from 35% to 20% faced by telecom carriers would be immediately accretive to cash flow. Trump's tax proposal will result in a huge windfall for telecom operators. The carriers can utilize this money for 5G network R&D and its deployment.
The telecom industry is highly capital-intensive in nature. Therefore, the immediate expensing of investment in all tangible, intangible and real property (other than land) would significantly benefit telecom carriers. This would encourage telecom operators to increase investment for capital expenditure. Major proposals such as a pledge to spend $1 trillion in infrastructure projects over a period of 10 years coupled with the above-mentioned policy changes are likely to spur higher consumer spending.
Trump has stated that he wants to do away with nearly 75% of all governmental regulations during his term as the President. We believe that the telecom industry will be one of the major beneficiaries of this policy change. A new Federal Communications Commission (FCC), headed by Ajit Pai, exercising lesser restrictions, certainly augurs well for the ISP (Internet Service Providers) industry.
The U.S. wireless industry is likely to get competitive in 2018 with the entry of cable MSOs (multi service operators). Comcast has already entered this space with its Xfinity Mobile offering. Importantly, the company acquired 73 licenses in the band of 600 MHz auctioned by the FCC. We believe that in the future Comcast will deploy this spectrum for extensive wireless coverage.
Charter Communications has reiterated its plans of launching wireless service in the first half of next year. Further, DISH Network has created an extensive portfolio of spectrum, the most important component of wireless networks. The company boasts a portfolio of 80 MHz of radio frequencies of different bands which will be utilized to deploy 4G LTE wireless network in the top 100 U.S. markets.
Telecom operator's wireline business is also struggling with persistent losses in access lines as a result of competitive pressure from voice-over-Internet protocol (VoIP) service providers and aggressive triple-play (voice, data and video) offerings by cable MSOs (multi service operators). These are weighing on the company's revenues and margins. Moreover, cord-cutting remains a major problem for all legacy pay-TV operators.
Internet TV streaming service market is quickly getting crowded. Moreover, a major concern for pay-TV operators, who recently entered into Internet TV streaming, is that the latter has actually cannibalized the legacy pay-TV service. Most of these companies are offering both legacy pay-TV services as well as Internet TV streaming service, with selected TV channels at lower costs.
Two Key Court Verdict is Awaiting
On Dec 14, 2017, in a landmark decision, the U.S. telecom regulator Federal Communications Commission (FCC) repealed the Net Neutrality laws that it had imposed under the Obama regime. There is little doubt that the ISP industry will be the major beneficiary after FCC dismantling Net Neutrality. Nevertheless, Net Neutrality supporters are preparing for a legal battle. The current FCC's less-restrictive regulatory attitude may also pave the way for new merger and acquisition deals between ISPs and online digital media companies. We expect this subject to remain a hot cake in the 2018 telecom space.
AT&T and media giant Time Warner are finally heading for a battle in court against the U.S. Department of Justice (DOJ) in 2018 over their $85.4 billion big-ticket merger deal. On Nov 20, 2017, the U.S. Department of Justice (DOJ) filed a lawsuit against the telecom behemoth over its mega acquisition deal citing that the proposed deal will increase prices for rival pay-TV operators as well as subscribers. It will also act as a stumbling block for the development of online video. Recently, AT&T and DOJ once again engaged in a settlement talk which failed to resolve the issue unanimously.
We believe that the decision will have a strong bearing on the recent convergence trend in the telecom-cable TV-media space. Cable TV and telecom giants are foraying into the media industry with big ticket acquisitions. Technologically, we are moving from triple-play (voice-video-data) bundled services offering to quad play (voice-video-data-mobile) bundled offering. Video-on-demand is the new norm for telecom, cable TV and media industries. Technological advancements have enabled distributors to come up with different ways of bundling and disseminating content, effective content creation methods and creating new business models. The DOJ's decision is a major concern for this new business model.
Stocks in Focus
We have zeroed in on five companies with strong long-term growth potential as these are poised to benefit the most in 2018 primarily due to their diversified product portfolio, lucrative product pipeline and strong cash flow. Each of these stocks carries a Zacks Rank #3 (Hold). You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here .
Verizon Communications Inc. VZ : The largest wireless operator in the United States has started conducting field trials for its upcoming 5G wireless network with partners. Verizon is planning to merge its Internet video service, Go 90, into other digital platforms. Oath is Verizon's new company overseeing Yahoo and AOL, including more than 20 brands. It is also likely to unveil Internet TV streaming service next spring. Verizon has a long-term (three-five years) EPS (earnings per share) growth estimate of 2.82% and a dividend yield of 4.44%.
AT&T Inc. T : The second largest wireless operator has also emerged a major pay-TV operator after its acquisition of DIRECTV offering both legacy satellite TV, fiber-based TV and online TV streaming services. At present, AT&T is awaiting the regulatory approval of its $85.4 billion mega media merger with Time Warner Inc. The company has strong foothold in Mexico, Brazil and a few other Latin American markets. AT&T has a long-term (three-five years) EPS growth estimate of 4.11% and a dividend yield of 5.03%.
Comcast Corp. CMCSA : The largest cable MSO (multi service operator) in the United States entered the wireless arena in mid-2017. The foray into the wireless space will enable the company to have a platform for expanding its Internet TV service. The wireless venture is also aimed at retaining customers in this competitive world. Moreover, the NBC Universal media division of the company is performing well. Comcast has a long-term (three-five years) EPS growth estimate of 10.14% and a dividend yield of 1.54%.
DISH Network Corp. DISH : The second largest satellite TV operator has created an extensive portfolio of spectrum, the most important component of wireless networks. The company also offers Internet TV streaming service. DISH Network's CEO Charlie Ergen has hinted that the company is interested in the potential deal-making to enter the wireless industry. At the same time, Ergen also stated that DISH Network has a clear plan of building a wireless network on its own. DISH Network has a long-term (three-five years) EPS growth estimate of 10.33%.
T-Mobile US Inc. TMUS : The leading national wireless service provider has decided to foray into the Internet TV streaming service in 2018. The company's network expansion and improvement plans, deployment of LTE-U technology and attractive unlimited data plans have helped it drive a significant number of new customers. It has decided to roll out 600 MHz wireless spectrum in its footprints and has conducted successful Narrowband Internet of Things (NB-IoT) tests live on its commercial network. T-Mobile US has a long-term (three-five years) EPS growth estimate of 22.26%.
Telecommunications is one of the few industries to have seen rapid technological improvement even during the recession. Owing to the significance of this service as an infrastructure product, we expect the overall economic dynamics to shift in favor of the industry. At this stage, we believe that these five stocks are poised to capitalize on the growing opportunities in 2018.
Zacks Editor-in-Chief Goes "All In" on This Stock
Full disclosure, Kevin Matras now has more of his own money in one particular stock than in any other. He believes in its short-term profit potential and also in its prospects to more than double by 2019. Today he reveals and explains his surprising move in a new Special Report.
Download it free >>
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report AT&T Inc. (T): Free Stock Analysis Report Verizon Communications Inc. (VZ): Free Stock Analysis Report DISH Network Corporation (DISH): Free Stock Analysis Report Comcast Corporation (CMCSA): Free Stock Analysis Report T-Mobile US, Inc. (TMUS): Free Stock Analysis Report To read this article on Zacks.com click here.