Telecom Industry Stock Outlook - June 2013

Zacks Equity Research

The telecommunications industry is a major driver of global economic recovery. Unprecedented growth in high-speed mobile Internet traffic, in particular for wireless data and video, has transformed the industry into a highly evolving, inventive and contested space. In addition, the emergence of wireless broadband technology has created several new service areas that offer huge growth potential.

Currently, the U.S. Telecommunications Industry is evolving around broad factors such as wireless gradually becoming the future of the telecom industry (and "spectrum" is its key word), and the high-speed fiber-based network is projected to expand more aggressively, especially for video/TV offerings. In addition, consolidation within the industry will continue mainly due to a shortage of airwaves and for attaining economies of scale.

Innovative products will be launched in areas of m-commerce, virtualization and cloud-based technology, high-speed metro Ethernet, to name a few. Apart from these, there still remains ample scope for expansion in the U.S. According to the Federal Communications Commission (:FCC), nearly a fifth of rural American households lack broadband access.     

Key Attribute

The lack of public airwaves (spectrum) in the telecommunications industry results in a high barrier to entry. The U.S. telecom market is controlled by just four national players, as regional low-cost operators are not eligible to compete with these large carriers.

Furthermore, it is not easy to establish a new telecom carrier since it will require government approval to transmit voice, data and video on public airwaves. Spectrum licenses are limited and therefore quite expensive. Moreover, the deployment of network infrastructure requires significant capital expenditure, which very few entities can afford.

We believe the overall economic dynamics may shift in favor of the telecommunications industry as it is a major infrastructure product for both the emerging and the developed nations. Telecommunications is one of the very few industries to witness considerable technological improvement, even during the recession. The continuous improvement in products and networks coupled with inventions by industry players provide a major thrust to the telecommunications sector.

Over the last 15 years, the U.S. wireless sector has invested a whopping $300 billion to install the most efficient seamless communications networks worldwide. The telecommunications industry as a whole generates over 2.6 million jobs in the U.S. This momentum is expected to continue in 2013 on increasing adoption of next-generation super-fast 4G LTE networks.

Moreover, growing demand for technically superior products has been the silver lining for the telecommunication industry in an otherwise tough environment. Metro Ethernet, IPTV, cloud computing, managed IP services are some of the major innovations in recent times. These developments are also helping telecom equipment manufacturers, infrastructure solutions providers, and mobile phone makers to consolidate their finances.

Zacks Industry Rank

Within the Zacks Industry classification, Telecommunications is broadly grouped in the Computer sector (one of the 16 Zacks sectors) and are further sub-divided into seven industries at the expanded level: Communications Infrastructure, Communications Components, Satellite Communications, Communications Semiconductor, Wireless Equipment Supplier, National Wireless Service Provider and Non-U.S. Wireless 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 #18, Communications Component is #191, Satellite Communications is #197, Communications Semiconductor is #88, Wireless Equipment Supplier is #199, National Wireless Service providers is #98 and Non-U.S. Wireless Operators is #195. Looking at the Zacks Industry Rank of the seven telecommunications industries, we derive that the near-term outlook for the group is tending toward 'Negative.'

Performance in the First Quarter of 2013

All three major telecom operators, namely, AT&T Inc. (T), Verizon Communications Inc. (VZ) and Sprint Nextel Corp. (S) outpaced the Zacks Consensus Estimate in the bottom line while the top line failed to meet. Semiconductor firm Qualcomm Inc. (QCOM) surpassed the Zacks Consensus Estimate in the revenue front and met the bottom line. Satellite TV operators DIRECTV (DTV) and DISH Network Corp. (DISH) failed to meet the Zacks Consensus Estimate whereas cable MSOs, Comcast Corp. (CMCSA) and Time Warner Cable Inc. (TWC) surpassed. Additionally, the telecommunications industry is known as a solid dividend paying sector. Most of the companies continued with their high dividend rate in the last quarter.

Wireless is the Key

Despite the massive growth in fiber-to-the-home networks, we believe that wireless networks will boost growth in the telecom industry. Moreover, the sector is witnessing a fundamental change. Earlier, it was voice calls that brought money to the operators whereas data and video have become the focus now. Any new network standard aims at faster data connectivity, quick video streaming with high resolution and rich multimedia applications.

Currently, the U.S. has approximately 300 million wireless subscribers. Mobile broadband has become the most lucrative source of revenue for the wireless operators. Massive growth of data buoyed by mounting smartphone adoption is the main reason for this favorable scenario.

The U.S. currently accounts for 70% of LTE subscribers in the world. Apart from the terrestrial wireless network, the U.S. has an advanced satellite broadband network, mobile satellite radio system and extensive Wi-Fi network.

Spectrum Crunch & Market Saturation

The U.S. wireless industry is facing acute spectrum shortage, resulting in data packet dropping at times. Carriers are investing heavily for more effective utilization of their existing spectrum holding and are trying hard to add more spectrums to their portfolio.

In addition to the four nationwide carriers, all the smaller pre-paid wireless operators are also opting for a sound LTE network to offer hassle free broadband video streaming and data transmission. Meanwhile, smartphone penetration has crossed more or less half of the post-paid wireless subscribers in the U.S. Currently even the pre-paid carriers are also offering high-end smartphones, such as iPhone 5.

Severe spectrum crunch coupled with gradual smartphone adoption is forcing the wireless operators to look for other options to raise revenues. These include new pricing plans, a shift from unlimited data usage to tier-based data usage, and higher upgrade fees for smartphones in order to offset handset subsidies. In fact, the average revenue per user for most of the wireless carriers has been rising over the last two years. It is also expected to grow in the long term, primarily due to massive growth in mobile data usage.

Nowadays, smartphone users are increasingly downloading multimedia content, thereby contributing substantially to network traffic. Interestingly, smartphone and tablet users are progressively uploading video content and are becoming broadcasters in their own right.

Mergers and Acquisitions to Continue

We believe that the U.S. telecom industry will witness more mergers and acquisitions in 2013. Verizon bought spectrum from major cable MSOs including Comcast, Time Warner Cable and Bright House Networks. T- Mobile US Inc. (TMUS) recently acquired MetroPCS. Softbank of Japan is trying hard to purchase Sprint Nextel.

Satellite TV operator DISH Network is storing radio frequencies and is trying to install a nationwide wireless network through acquisitions or collaborations with the existing players. DISH is currently pursuing two takeovers of 4G WiMAX wholesalers, Clearwire Corp. (CLWR) and Sprint Nextel.


The telecommunications industry as a whole offers a number of attributes that are difficult to ignore from the standpoint of investors.

  • Telecommunications is a necessary utility: The need for telecom in both rural and urban areas, and its role in the infrastructure of both developed and developing markets, will continue to grow. In addition, economic stimulus plans in the U.S. and throughout the world should boost select service providers and equipment manufacturers.
  • Spectrum Auction: On Sep 28, 2012, the FCC decided to free up spectrum currently used by TV broadcasters for commercial wireless networks and to deploy a nationwide interoperable public-safety broadband network. Huge proliferations of smartphones, tablets, and several other pocket-sized mobile devices have significantly increased the demand for bandwidth for seamless wireless connectivity. The spectrum auction is expected to shore up $15 billion in the U.S. government exchequer.  
  • Strong Demand: A recovering economy speeds up the demand for real-time voice, data, and video manifold. The FCC has estimated that within the next five years, mobile-data demand will grow 25-50 folds from its current level. These latest developments are enabling the telecom service providers to undertake large network extensions while upgrading plans.

The companies that match well with the aforementioned considerations include Telus Corp. (TU), Telefonica Brasil S.A. (VIV), Research In Motion Ltd. (BBRY), Polycom Inc. (PLCM) and Crown Castle International Corp. (CCI). All these stocks currently have a Zacks Rank #2 (Buy).


Generally the telecommunications companies that are under pressure have high debt levels and large financial leverage ratios or are unable to cope with the recent market trends. Other risks that remain are as follows:

  • Potential Business Slowdown: Lower overall top-line sales among carriers are expected to continue to weigh on capital spending decisions -- a major problem faced by equipment vendors. The companies are expected to remain focused on improving their balance sheets, financial discipline and free cash-flow generation.
  • Product Overlapping: We may see more product sharing deals between telecom, cable TV and satellite TV operators as each of these players are trying to get a foothold into each other’s territory. Even pay-TV services, offerings to business enterprises, and mobile backhaul and metro-Ethernet segments may witness more convergence. Mobile phone makers are now gradually offering tablets (small laptops); chipset manufacturers are offering personal computers and mobile phones are frequently interchanging their areas of operations.
  • Increased Competition: Technological upgrades and breakthroughs have resulted in cutthroat price competition. Product life-cycle and upgrade-cycle have been reduced drastically as several firms are introducing new products and services within a short span of time. Increasing competition is forcing every player to offer heterogeneous and bundled services.

Signs of the above-mentioned weaknesses can be seen in France Telecom S.A. (FTE), JDS Uniphase Corp. (JDSU), Chunghwa Telecom Co. Ltd. (CHT) and NTT DoCoMo Inc. (DCM). All these stocks currently have a Zacks Rank #4 (Sell).

VERIZON COMM (VZ): Free Stock Analysis Report

CLEARWIRE CORP (CLWR): Free Stock Analysis Report

COMCAST CORP A (CMCSA): Free Stock Analysis Report

DISH NETWORK CP (DISH): Free Stock Analysis Report

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

SPRINT NEXTEL (S): Free Stock Analysis Report

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