If money were water, providers of telecommunications gear and services might all be building arks.
A November announcement fromAT&T ( 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 rollout.
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 come."
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 ( PCS ) units.
Not to be outdone, the world's largest mobile operator by revenue and subscribers,China Mobile ( CHL ), on March 14 outlined an aggressive next-generation wireless network buildout.
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 December.
China Mobile's 4G wireless investments are just one corner of its $30 billion spending budget for 2013, a 52% increase over 2012.
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.
Sweden-basedEricsson ( ERIC ), 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 ( ALU ), 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 mobile phones.
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 advertising sectors.
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 cycle.
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 competitor.
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 2014.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
