The overall Technology sector, of which Telecom is an essential part, is likely to report relatively healthy second-quarter 2020 earnings compared with other sectors. Despite taking a hit due to the coronavirus pandemic, which disrupted normal business operations of various telecom firms, the sector appears to have been better placed, with digital sustainability being the norm of the day. However, a ‘supply shock’ caused by factory shutdowns and travel restrictions sparked by the virus outbreak have affected the sector’s profitability. Sector revenues, particularly within the chip industry, are expected to have declined as the market bore the brunt of the adverse economic impact of the global lockdown.
Various trade restrictions on grounds of national security concerns further hampered the supply-chain mechanism of companies and eroded sector margins. In addition, higher infrastructure investments are expected to have escalated operating costs as 5G deployments picked up pace across the United States.
Upfront investments in capital and wireless spectrum for 5G have proven to be substantially higher than prior generations of wireless deployments due to network density requirements, potentially hurting return of capital metrics. The potential for meaningful revenues to lag 5G buildouts poses significant credit risks for providers pursuing aggressive deployments. This has become all the more pronounced as the industry lacks any clarity on the actual impact of the virus on businesses, forcing some companies to even withdraw guidance.
Technological advances have changed the way consumers communicate, resulting in higher home data consumption and video streaming, as countless people seek the refuge of the safety of their homes to prevent exposure to the virus. But the worldwide mayhem induced by the virus, intense competition and commoditization of services have limited the chances of benefiting from these trends.
Per the latest Earnings Preview, total earnings for the Technology sector for the June quarter are expected to be down 3.2% on 3.2% higher revenues year over year. This compares unfavorably with the prior quarter’s earnings growth of 3.8% on 4% revenue growth.
Let’s take a look at two Telecom stocks that are slated to report quarterly results on Aug 5.
CenturyLink, Inc. CTL is slated to report second-quarter 2020 results after the closing bell. The company is expected to have recorded lower aggregate revenues on a year-over-year basis, primarily due to economic disruptions stemming from the COVID-19 pandemic. For the June-end quarter, the Zacks Consensus Estimate for total revenues is pegged at $5,138 million that indicates a decline of 7.9% from the year-ago quarter’s reported figure. The consensus mark for adjusted earnings per share are pegged at 32 cents, which calls for a decline of 5.9% from the prior-year quarter’s recorded figure.
Our proven model does not conclusively predict an earnings beat for CenturyLink this time around. The combination of a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) increases the chances of an earnings beat. This, however, is not the case here.
CenturyLink currently has an Earnings ESP of +4.94% and a Zacks Rank #4 (Sell).
CenturyLink, Inc. Price and EPS Surprise
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During the quarter under review, CenturyLink launched its Managed Security Behavioral Analytics service package in the Asia Pacific to help organizations detect insider threats on critical assets. The company also expanded its fiber network in many parts of the United States, bringing faster Internet speeds to additional homes and businesses in several cities. However, CenturyLink’s core local phone business has slowed down significantly due to the substitution of traditional wireline telephone services by wireless and other competitive offerings, and lower long-distance minutes of use. In addition, soft demand for certain services amid coronavirus-induced uncertainties are likely to have affected second-quarter revenues.
Maxar Technologies Inc. MAXR is scheduled to report second-quarter 2020 results after the closing bell. For the June-end quarter, the Zacks Consensus Estimate for aggregate revenues is pegged at $428 million that indicates a decline of 12.7% from the year-ago quarter’s reported figure. The consensus mark for adjusted loss per share is pegged at 21 cents, which calls for deterioration of 187.5% from the prior-year quarter’s recorded figure.
Maxar currently has an Earnings ESP of +31.71% and a Zacks Rank #2.
Maxar Technologies Ltd. Price and EPS Surprise
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During the quarter, Maxar was chosen by the U.S. Department of Homeland Security to develop an analytics system for tracking the behavior of vehicles in multiple domains at scale. The contract, valued at $23 million with five years of performance, is administered through the U.S. Department of the Interior. Maxar closed its previously-announced acquisition of 3D data and analytics firm, Vricon, for almost $140 million. Such developments are likely to have positively impacted the company’s second-quarter top line.
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