The Zacks Wireless National industry appears to be mired in raw material prices volatility and supply-chain disruptions due to chip shortage and the coronavirus-induced adversities that have affected the delivery schedule of most companies. Moreover, high capital expenditures for infrastructure upgrades for 5G deployment and margin erosion due to price wars have dented the industry’s profitability.

Nevertheless, AT&T Inc. (T Quick QuoteT - Free Report) , United States Cellular Corporation (USM Quick QuoteUSM - Free Report) and Liberty Latin America Ltd. (LILA Quick QuoteLILA - Free Report) are likely to benefit in the long run from higher demand for scalable infrastructure for seamless connectivity amid a wide proliferation of IoT and faster pace of 5G rollout.

Industry Description

The Zacks Wireless National industry primarily comprises companies that provide a comprehensive range of communication services and business solutions. These include wireless, wireline, local exchange, long-distance calls, data/broadband and Internet, video, managed networking, messaging, wholesale and cloud-based services to retail consumers. The firms within the industry also offer IP-based voice and data services, targeted advertising, television, streaming content, cable networks and publishing operations, multiprotocol label switching networking, fiber optic long-haul network, hosting and communications systems to businesses and government agencies. In addition, the firms provide edge computing services that allow businesses to route application-specific traffic to where it is required and is most effective — whether in the cloud, the network, or on their premises.

What's Shaping the Future of Wireless National Industry

Passage of Infrastructure Bill Instills Confidence: The passage of the $1.2 trillion infrastructure bill in the House instills sector confidence. The multi-billion infrastructure bill includes a $65 billion provision to significantly expand broadband access to Americans as the administration aims to fortify its technological prowess to thwart the dominance of countries like China. The plan envisions reaching the underserved areas of the country and prioritizing support for broadband networks affiliated with local governments, nonprofit organizations and cooperatives to encourage strong competition with privately-owned companies. The plan has also earmarked funds for the tribal areas that lack access to high-speed Internet. It is likely to lower the prices for Internet services by requiring funding recipients to offer a low-cost affordable plan and encourage price transparency.

Evolution to Software-Centric Model: The industry is currently facing an acute shortage of chips, which are the building blocks for various equipment used by telecom carriers. Although the Biden administration is trying to address the global shortage of semiconductor chips and devise ways to increase domestic production, the demand-supply imbalance has crippled operations and largely affected profitability due to inflated equipment prices. Aggressive promotional expenses, lucrative discounts and adoption of several low-priced service plans to attract and retain customers are further eroding profits. A steady decline in linear TV subscribers and legacy services are adding to the margin woes. Consequently, the firms within the industry are increasingly seeking diversification from legacy telecom services to more business, enterprise and wholesale opportunities. The companies are making significant investments to upgrade network and product portfolio, including considerable advances in software-defined, wide-area network capabilities and a new Cloud Core architecture. This has realigned the companies’ wireless network toward a software-centric model to cater to the increasing business demands and customer needs through remote facilities. The companies are focused on bringing improved operational efficiencies through network simplification and rationalization, thereby boosting end-to-end provisioning time and driving standardization.

Fast-Track Deployment of 5G & Fiber Optic: Most of the industry participants are deploying the latest 4G LTE Advanced technologies to deliver higher peak data speeds and capacity, driven by customer-focused planning, disciplined engineering and investments for infrastructure upgrade. The companies are also expanding their fiber optic networks to support 4G LTE and 5G wireless standards as well as wireline connections. The fiber-optic cable network is vital for backhaul and the last mile local loop, which are required by wireless service providers for 5G deployment. Fiber networks are also essential for the growing deployment of small cells that bring the network closer to the user and supplement macro networks to provide extensive coverage. Further, leading firms within the industry have bid aggressively in the FCC-led C-Band auction for mid-band airwaves. The C-Band offers significant bandwidth with better propagation characteristics for optimum coverage in both rural and urban areas compared with mmWave. As the 5G ecosystem evolves, customers are expected to experience significant enhancements in coverage and speed. However, increased infrastructure spending has largely compromised short-term margins, and unless the high investments generate healthy ROI in the long run, it is likely to weigh on the bottom line.

Streaming Content Focus: The industry participants are taking a holistic approach to content delivery in order to help providers anticipate demand for more personalized, relevant and on-the-go experiences. Moreover, the firms are offering a variety of pathways for delivering services through a combination of network-based video transcoding, packaging, storage and compression technologies to offer new IP video formats, live TV, streaming services and home gateways to connected devices inside and outside home. In addition, some sector firms are reinventing online advertising by pooling a unique set of assets — valuable consumer data and insights, advanced advertising capabilities and engaged passionate fanbases. This has led to a faster turnaround of advertising campaigns, enabling marketers to access and understand the efficacy of these messages in weeks instead of months. These, in turn, are giving a new dimension to the business models.

Zacks Industry Rank Indicates Bullish Prospects

The Zacks Wireless National industry is housed within the broader Zacks Computer and Technology sector. It carries a Zacks Industry Rank #115, which places it at the top 45% of more than 250 Zacks industries.

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates encouraging prospects. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1. The industry’s positioning in the top 50% of the Zacks-ranked industries is a result of a positive earnings outlook for the constituent companies in aggregate.

Before we present a few wireless national stocks that are well-positioned to outperform the market based on a strong earnings outlook, let’s take a look at the industry’s recent stock market performance and valuation picture.

Industry Lags S&P 500 & Sector

The Zacks Wireless National industry has lagged the broader Zacks Computer and Technology sector and the S&P 500 composite over the past year largely due to COVID-19 woes and supply-chain disruptions, despite underlying solid growth potential.

The industry has lost 11.6% over this period against the S&P 500 composite and the sector’s rise of 28.5% and 26.3%, respectively.

One Year Price Performance

Industry's Current Valuation

On the basis of the trailing 12-month enterprise value-to EBITDA (EV/EBITDA), which is the most appropriate multiple for valuing telecom stocks, the industry is currently trading at 6.84X compared with the S&P 500’s 16.17X. It is also below the sector’s trailing-12-month EV/EBITDA of 15.79X.

Over the past five years, the industry has traded as high as 12.03X and as low as 5.44X and at the median of 6.76X, as the chart below shows.

Trailing 12-Month enterprise value-to EBITDA (EV/EBITDA) Ratio

3 Wireless National Stocks Likely to Move Ahead of the Pack

AT&T Inc.: Based in Dallas, TX, AT&T is one of the world’s leading communications service carriers. The company expects to continue investing in key areas and adjusting its business according to the evolving market scenario to fuel long-term growth while maintaining a healthy dividend payment and actively pruning debt. The stock has a long-term earnings growth expectation of 3.7% and a VGM Score of B. The Zacks Consensus Estimate for current-year earnings has been revised 7.5% upward in the past year. It delivered an earnings surprise of 10%, on average, in the trailing four quarters. An integrated fiber expansion strategy is expected to improve the broadband connectivity for both enterprise and consumer markets, while steady 5G deployments are likely to boost end-user experience. In order to expand coverage and improve connectivity, AT&T acquired 80MHz of mid-band spectrum in the C-Band auction for a total consideration of $27.4 billion. The company has also inked a definitive agreement with Discovery, Inc. to spin off its media assets and merge them with the complementary assets of the latter. The transaction is expected to enable the carrier to trim its huge debt burden and focus on core businesses to facilitate optimum utilization of resources for enhancing value. T carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Price and Consensus: T

U.S. Cellular: Headquartered in Chicago, IL, U.S. Cellular provides a range of wireless products and services and a high-quality network to increase the competitiveness of local businesses and improve the efficiency of government operations. The stock has gained 3.1% in the past year and delivered an earnings surprise of 4.1%, on average, in the trailing four quarters. The Zacks Consensus Estimate for current-year earnings has been revised 14.9% upward over the past year, and that for the next year is up 42.6% over the same time frame. U.S. Cellular has taken concrete steps to accelerate subscriber additions and improve churn management. In order to increase smartphone penetration, the company has initiated shared data plans for consumers and businesses at minimal charges. U.S. Cellular continues its network modernization program, adding capacity and speed while launching 5G services commercially and Voice over Long Term Evolution (VoLTE) services. The stock carries a Zacks Rank #2 (Buy) and has a VGM Score of B.

Price and Consensus: USM

Liberty Latin America: Based in Denver, CO, Liberty Latin America is a communications firm with operations in Chile, Puerto Rico, the Caribbean and other parts of Latin America. The stock has gained 4.1% in the past year and has a VGM Score of A. The Zacks Consensus Estimate for current-year earnings has been revised 282.2% upward over the past year, and that for the next year is up 933.3%. Liberty Latin America is poised to benefit from end-to-end communications platform, leveraging the power of a sub-sea network, fixed-line networks & mobile platforms. With an expanded geographic footprint and upgraded infrastructure facilities, it is likely to deliver enterprise-grade connectivity, data center, hosting and managed solutions and IT services. It carries a Zacks Rank #2.
Price and Consensus: LILA