Telecom Stock Roundup: AT&T Mulls Divestitures, Ericsson's Smart Factory & More

In the past five trading days, telecom stocks have witnessed a gradual uptrend due to a thaw in Sino-U.S. relationship as President Trump and his Chinese counterpart reached a trade war truce on the sidelines of G20 summit in Osaka, Japan. As China is a vital market for various telecom components, the resumption of bilateral trade talks is expected to buoy the industry that has borne the brunt of the tariff war. Moreover, easing of some of the trade restrictions on Chinese telecom equipment manufacturer Huawei brought a sense of relief to several U.S. suppliers, and propelled the industry as a whole.

Just as the doctor ordered, Trump offered a much-needed boost to the beleaguered telecom industry when he announced a ceasefire to his proposed plans to levy additional tariffs on $300 billion of remaining Chinese imports. Although the existing tariffs remained in place, both the state heads decided to resume the bilateral trade negotiations to prevent further escalation of conflicts, while extending olive branch to each other. While Trump agreed to ease some trade embargoes on Huawei, Chinese President Xi Jinping pledged to buy an unspecified amount of U.S. farm products. Led by intense lobbying by U.S. suppliers that were handicapped by the strict government ban, the decision marked a significant shift from the earlier rigid stance of the respective leaders and underscored the domestic compulsions. While Trump is expected to gain mileage for his re-election bid on higher farm produce export, Jinping is likely to benefit from the free flow of U.S. components as the communist nation is battling muted economic growth.

Despite the outreach and visible camaraderie, not much has changed in reality as Huawei is still considered to be blacklisted by the enforcement staff of the U.S. Commerce Department. The White House has further downplayed the trade concessions as one that are routine low-tech items, unrelated to national security concerns. The Trump administration has also initiated a 150-day review process of the U.S. telecommunications supply chain to ensure that 5G equipment used in the country is designed and manufactured outside China. The government is seeking an informal response from various equipment manufacturers to thwart any possible data espionage by eliminating purported attempts by Chinese engineers to insert security holes into technology made in China. The U.S. officials are reportedly mulling to allow the manufacturing of benign analog components, such as power converters and protective cases in the communist nation. But they intend to restrict the same for ‘intelligent’ components that deal with data-intensive applications like cellular-tower hardware, routers and switches.  

Nevertheless, the restoration of the bilateral trade negotiations has breathed a fresh lease of life in the industry. It remains to be seen how they pan out in the future and eliminate the various stumbling blocks that threaten to derail a significant breakthrough in the trade impasse.  

Regarding company-specific news, divestures, 5G deployment, collaborations and strategic deals primarily took the center stage over the past five trading days.

Recap of the Week’s Most Important Stories

1.    AT&T Inc. T is reportedly mulling over the sale of its four regional sports networks in a bid to reduce its heavy-debt balance sheet. The move is part of the telecom giant’s ongoing efforts to trim up to $8 billion in liability by the end of 2019, although no official announcement has yet been made.

The wireless service provider is actively working out ways to honor its de-leveraging goals with healthy free cash flow and asset sales. At the end of first-quarter 2019, AT&T had $6,516 million in cash and equivalents with $163,942 million of long-term debt. It remains committed toward managing its debt portfolio and is on track to achieve its target of 2.5x debt-to-EBITDA range by 2019. (Read more: AT&T Might Unload Regional Sports Networks to Reduce Debt)

2.     Ericsson ERIC has announced plans of building its first fully automated smart factory in the United States. The Swedish telecom equipment maker has been focusing on working more closely with its customers to support them in the build out of 5G globally, particularly in North America.

Notably, the avant-garde facility will likely produce Advanced Antenna System radios to increase network capacity and coverage. This includes rural coverage and 5G radios for urban areas, required for rapid 5G deployments in North America. (Read more: Ericsson to Build Smart Factory in US, Eyes Global Expansion)

3.   Recently, Nokia Corporation NOK announced that China Mobile Communications Corporation will deploy its new AirScale mMIMO Adaptive Antenna (MAA). The Finnish telecom equipment provider’s state-of-the-art solution has been formulated particularly for the massive bandwidth and coverage requirements of the Chinese market as it shifts to 5G.

Markedly, the MAA uses 64 transmit and 64 receive antenna elements, which jointly delivers a total of 320W output power. The collaboration aims to build the latest version of the MAA, which is at least 80W greater than the nearest available variant in the market. (Read more: Nokia's New Massive MIMO Solution Chosen by China Mobile)

4.     InterDigital, Inc. IDCC has announced its participation in the 5GROWTH project – a joint initiative between the European Commission and the European information and communication technology industry.

As part of the third phase of the H2020 5G Infrastructure initiative, 5GROWTH seeks to facilitate vertical industries with automated and intelligent 5G solutions. InterDigital is optimizing its strength in core wireless licensing business and remains poised to benefit from future growth opportunities, fueled by the 5G rollout. (Read more: InterDigital Announces Participation in 5GROWTH Project)

5.     Zayo Group Holdings, Inc. ZAYO recently secured a contract from an unnamed global investment bank to augment its network capabilities in Europe. Per the deal, Zayo will offer a private wavelength network to the financial services provider for seamless connectivity between several of its offices and data center locations.

The strategic deal seems to be the call of the hour as financial services firms worldwide continue shifting from legacy copper networks to fiber-based connectivity solutions to support bandwidth-intensive applications. These include secure file sharing, large file transfers, business intelligence applications and data analysis. In addition to improved connectivity solutions, Zayo will provide round-the-clock support services to the bank. (Read more: Zayo to Boost Bank Connectivity for Bandwidth-Intensive Apps)

Price Performance

The following table shows the price movement of some of the major telecom stocks over the past week and during the past six months.

In the past five trading days, CenturyLink was the biggest gainer with its share price increasing 7.1% while none of the stocks declined.

Over the past six months, Motorola has been the best performer with its stock appreciating 31.9%, while CenturyLink was the biggest decliner with its stock down 38.7%.

Over the past six months, the Zacks Telecommunications Services industry has recorded average growth of 0.6% while the S&P 500 has rallied 15.1%.

What’s Next in the Telecom Space?

In addition to product launches and deployment of 5G technologies, all eyes will remain glued to how the United States and China embrace the fresh round of trade negotiations and its cascading effect on the industry.

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