Telecom Industry Stock Outlook - May 2015 - Industry Outlook

U.S. Telecom Industry: Spectrum Sales Rise, M&A in Progress

Telecom is a necessary utility. The need for telecommunications in both rural and urban areas as well as its role in the infrastructural development of an economy is of vital importance. The U.S. telecom industry has developed into an intensely contested space where success largely depends on technical superiority, quality of services and scalability. In order to stay ahead, existing players need to introduce innovative products or merge with other companies despite strict vigil by regulator Federal Communications Commission (FCC).

Strong Demand for Spectrum

Wireless networks are the key for future growth of the overall telecom industry. As wireless networks runs on radio frequency, spectrums (airwaves) have become the most sought-after commodity in the industry. The recent FCC conducted Advanced Wireless Servies-3 (AWS-3) spectrum auction accumulated a record-breaking $44.89 billion.

In 2008, the FCC-conducted wireless spectrum auction had accumulated only $19.6 billion, which clearly shows the growing popularity of airwaves. The FCC also plans to conduct a broadcast incentive (spectrum with TV broadcasters) auction in 2016 to ease the pressure on wireless operators and thereby ensure uninterrupted transmission of data/voice packets.

Unexpectedly high bidding for AWS-3 spectrum also indicates that telecom operators expect the demand for mobile data and video services to rise in the future. The spectrum license winners from different regions will upgrade their respective networks to gain a competitive edge. Wireless network standards are continuously evolving around the globe to offer faster speed. This in turn is likely to result in increased capital expenditures and a surge in demand for telecom infrastructure gears.

Mergers & Acquisitions to Continue

Mergers and acquisitions (M&A) have been a common phenomenon in the U.S. telecom industry despite the formation of strict regulations by the FCC to put a check on monopolistic practices. The U.S. telecom industry is likely to witness more M&A going forward.

In 2014, Verizon Communications Inc.'s ( VZ ) takeover of the remaining 45% stake of Verizon Wireless from Vodafone Group Plc. ( VOD ) for $130 billion marks the largest acquisition in the wireless industry. Verizon recently decided to acquire AOL Inc. ( AOL ) to diversify its business into mobile video content creation and online real-time advertising market.

In Apr 2015, Comcast Corp. ( CMCSA ) dropped its 14-month old $45.2 billion merger deal with Time Warner Cable Inc. ( TWC ) because of strong reservations expressed by the FCC and the Department of Justice against the deal.

Following the termination of the deal, Charter Communications Inc. ( CHTR ) is again exploring ways of bidding for Time Warner Cable, the second largest cable TV operator in the U.S. In this context it is worth noting that Charter Communications had initially expressed its intention of acquiring Time Warner Cable. In the meantime, Time Warner Cable is negotiating with Bright House Network LLC over a possible merger,

Notably, another big-ticket merger deal between AT&T Inc. ( T ) and DIRECTV ( DTV ) is still awaiting regulatory approval. In May 2014, AT&T had reached a definitive agreement with DIRECTV to acquire the latter for a consideration of $48.5 billion. DIRECTV is the largest satellite TV operator in the U.S. while AT&T has a strong fiber-based video network. Both companies are hopeful of attaining FCC's nod for the merger by the end of Jun 2015.

Geographical Expansion

U.S. telecom carriers have the option to expand globally through acquisitions or partnerships as several emerging nations are installing 3G and 4G networks rapidly. Notably, AT&T recently acquired Grupo Iusacell, the third largest wireless operator in Mexico and all telecom assets of currently bankrupt NII Holdings Inc. in Mexico. Further, in Apr 2015, Sprint Corp.'s ( S ) prepaid service division -- Boost Mobile -- launched an unlimited voice call and text message service plan to enhance connectivity between U.S. inhabitants and their friends and family in Cuba.

Comcast and Liberty Global Plc. ( LBTYA ), the leading cable MSOs in the U.S. and Europe respectively, have formed an alliance to offer industry's first international WiFi roaming connectivity to their subscribers. The cross-continent WiFi interoperability will provide a free alternative to the wireless data roaming facility.

Internet TV Gains Traction

Internet TV is gradually gaining market traction in the U.S. Of late, the legacy pay-TV industry in the country has been facing severe 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 has emerged as a strong alternative to counter this competitive threat.

In Feb 2015, DISH Network Corp. ( DISH ) had commercially launched its Internet TV service called "Sling TV" throughout the U.S. The Sling TV service is available for $20 a month and offers several top-rated channels. Customers are also offered add-on packages for an additional $5 per month. In the same league, the U.S. division of Sony Corp. ( SNE ) recently launched its new PlayStation Vue Internet TV service in New York, Chicago and Philadelphia. The service is set for a national rollout later this year.

Verizon, which is currently the sixth largest pay-TV operator in the U.S., seeks to focus on two different categories of viewers through its Internet TV service and fiber-based FiOS TV offerings. Additionally, AT&T entered into a partnership with Chernin Group to offer similar services.

Zacks Industry Rank

Within the Zacks Industry classification, Telecom is broadly grouped in the Computer and Technology sector (one of the 16 Zacks sectors) and are further sub-divided into twelve industries at the expanded level: Communications Infrastructure, Satellite Communications, Cable TV, Diversified Communications Services, Internet Services, Wireless Equipment Supplier, National Wireless Service Provider, Rural Wireless Operator, Rural Wireline Operator, Non-U.S. Wireless Operator, National Wirleline Operator and Non-U.S. Wireline Operator. The level of sensitivity and exposure to different stages of the economic cycle vary for each industry.

We rank all the 260 plus industries in the 16 Zacks sectors based on the earnings outlook and fundamental strength of the constituent companies in each industry. To learn more visit: About Zacks Industry Rank . As a guideline, the outlook for industries with a Zacks Industry Rank of #88 and lower is 'Positive,' between #89 and #176 is 'Neutral' and #177 and higher is 'Negative.'

The Zacks Industry Rank for Communications Infrastructure is #202, Internet Services is #160, Satellite Communications is #202, Cable TV Operators is #117, Diversified Communications Services is #92, Wireless Equipment Supplier is #87, National Wireless Service providers is #183, National Wireline Operators is #207, Rural Wireless Operators is #12, Rural Wireline Operators is #117, Non-U.S. Wireless Operators is #233 and Non-U.S. Wireline Operators is #117. Looking at the Zacks Industry Rank of the twelve telecommunications industries, we derive that the near-term outlook for the group is tending toward 'Neutral.'

Earnings Trend of the Sector

The broader Technology sector, of which the telecommunications industry is part, remains moderate with respect to earnings. So far, 76.2% of the sector participants have reported first-quarter 2015 financial results, which have been mixed in terms of beat ratios (percentage of companies coming out with positive surprises) and have also generated moderate earnings and revenue growth figures.

Both the earnings and revenue beat ratios were modest at 47.9% and 45.8%, respectively. Nevertheless, total earnings for the reported companies have shown a 6.9% year-over-year increase on 7.5% growth in revenues. This compares unfavorably with a substantially higher earnings growth of 13.8% on 8.1% growth in revenues in the fourth quarter of 2014.

Meanwhile, the consensus earnings expectation for full-year 2015 depicts a mediocre trend. Earnings growth is expected to rise 5.3% in the first quarter but is likely to decline 1.6% in the second quarter of 2015. Overall, the sector is expected to register full-year 2015 earnings growth of 7.0%.

For a detailed look at the earnings outlook for this sector and others, please read our weekly Earnings Trends reports.

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VERIZON COMM (VZ): Free Stock Analysis Report

VODAFONE GP PLC (VOD): Free Stock Analysis Report

TIME WARNER CAB (TWC): Free Stock Analysis Report

AT&T INC (T): Free Stock Analysis Report

SONY CORP ADR (SNE): Free Stock Analysis Report

SPRINT CORP (S): Free Stock Analysis Report

LIBERTY GLBL-A (LBTYA): Free Stock Analysis Report

DIRECTV (DTV): Free Stock Analysis Report

DISH NETWORK CP (DISH): Free Stock Analysis Report

COMCAST CORP A (CMCSA): Free Stock Analysis Report

CHARTER COMM-A (CHTR): Free Stock Analysis Report

AOL INC (AOL): Free Stock Analysis Report

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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.

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