Telecommunications is a vital industry witnessing rapid technological improvement. Unprecedented growth in high-speed mobile Internet traffic, particularly with respect to wireless data and video, has transformed this industry into the most evolving, inventive and keenly contested space.
In addition, a major characteristic of the telecommunications industry is that it is immune to international geopolitical disturbances even when they lead to economic fluctuations. The need to remain connected is human, springing from our earliest tendencies to communicate. An era of digitization and technology is essentially built on this human craving. It is here that telecommunications come to the fore as a necessary utility.
Therefore any non-U.S. economic volatility is not expected to have an immediate impact on the industry. Ongoing turmoil in the global economy due to a persistent slowdown in China and its currency devaluation together with the sovereign debt crisis in Europe had little impact on the telecommunications sector.
The U.S. telecommunications industry is presently on a growth trajectory and the momentum is likely to sustain through 2015.
2 Key Features
The telecommunications industry has two key features that are difficult to disregard from the standpoint of investors.
· Barrier to Entry: The telecommunications industry is characterized by a high barrier to entry. The deployment of network infrastructure requires significant capital expenditure, which very few entities can afford. Furthermore, it is not easy for a new telecom carrier to establish itself in the market as it requires government approval to transmit voice, data, and video. Thus, this barrier protects the profits of incumbents.
· Strong Demand: A growing economy speeds up the demand for real-time voice, data, and video manifold. The escalation in demand has encouraged telecom service providers to undertake large network extensions while upgrading plans. The rising demand for technologically superior products has been a silver lining for the telecommunication industry in an otherwise tough environment.
At this stage, we believe investors should choose stocks which carry a favorable Zacks Rank to cash in on future growth. Taking these factors into account, we present four such stocks with either a Zacks Rank #1 (Strong Buy) or Zacks Rank #2 (Buy) for investors to consider:
Sprint Corp.S : This Zacks Rank #1 company has a strong portfolio of wireless spectrums. Although those assets are of a less valuable high-band nature, the company can still effectively utilize them for network performance improvement. Management has in fact undertaken a massive network upgrade project to improve its performance.
In order to remain competitive, Sprint has been launching several low-priced data and voice plans over the past one year. This strategy has helped the company to stem its postpaid wireless subscriber losses and has finally led to overall subscriber gains. Moreover, the company has taken a cost-cutting measure which will save approximately $2.5 billion per annum.
For the second quarter of fiscal 2015 (ended Sep 30), the Zacks Consensus Estimate stands at a loss of 9 cents, reflecting a year-over-year improvement of 52.6%. For fiscal 2015, the Zacks Consensus Estimate stands a loss of 38 cents, indicating a year-over-year improvement of 23.7%. Estimated long-term growth (3 -- 5 years) is currently pegged at 13.4% compared with the industry average of just 9.1%.
T-Mobile US Inc.TMUS : This Zacks Rank #2 company recently announced that its net subscriber addition in the third quarter of 2015 has surpassed the second quarter's number. Despite stiff competition, the company's unique "Un-Carrier" business model has gained immense popularity helping it to gain a large number of customers.
T-Mobile US is gradually deploying LTE network on its 700 MHz spectrum holdings to enhance its service quality outside major urban areas. Recent license wins in the AWS-3 spectrum auction should further help the company in its plans to expand network coverage. Moreover, management has decided to acquire a substantial amount of spectrum in the upcoming 600 MHz low-band spectrum auction to be conducted in 2016.
For the third quarter of 2015, the Zacks Consensus Estimate stands at 33 cents, reflecting year-over-year growth of a whopping 375%. Meanwhile, the consensus estimate for revenues is $8,218 million, up 11.8% year over year. For 2015, the earnings estimate stands at 98 cents, indicating year-over-year growth of an impressive 226.4% while that of revenues is $32,969 million, up 11.5% year over year.
United States Cellular Corp.USM : The eighth largest wireless carrier in the U.S. has decided to install over 600 LTE cell sites in 2015 which will expand its existing LTE service in 10 states. It will also cover 98% of its subscriber base with LTE service. Further, management has decided to divest non-strategic assets so as to invest in long-term growth projects. This Zacks Rank #2 company is focusing on improving cost and profitability by managing data delivery cost and has introduced equipment instalment plans.
For the third quarter of 2015, the Zacks Consensus Estimate stands at a loss of 1 cent, reflecting a substantial year-over-year improvement of 98.1%. The estimate for revenues stands at $1,014 million, up 1.4% year over year. For 2015, the Zacks Consensus Estimate is pegged at $1.65, indicating year-over-year growth of an enormous 232%. The same for revenues stands at $3,998 million, up 2.7% year over year.
Cincinnati Bell Inc.CBB : This leading regional diversified telecommunications service provider with a Zacks Rank #2 is poised to deliver long-term growth on the back of its investments in strategic products, high speed Internet and strong managed service demand. Its wireline segment is the prime growth driver with continuous strength for fiber deployment. Specifically, stepped up investments in strategic products are expected to open up ample opportunities for the business customers, thus enhancing revenues and profitability.
For the third quarter of 2015, the Zacks Consensus Estimate stands at 3 cents, reflecting year-over-year growth of a significant 200%. The same for revenues is pegged at $281 million, down 14.3% year over year. For 2015, the Zacks Consensus Estimate stands at 6 cents, highlighting year-over-year growth of 175%. However, the Zacks Consensus Estimate for revenues stands at $1,143 million, down 10.6% year over year.
The Bottom Line
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 4 stocks with a favorable Zacks Rank are poised to capitalize on the growing opportunities.
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