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Wireless Non-US Industry Near-Term Outlook Appears Bleak
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The Zacks Wireless Non-US industry comprises mobile telecommunications and related service providers based on foreign shores. The industry participants primarily offer voice services, including local, domestic and international calls and roaming services, prepaid and postpaid, as well as value-added services. These companies also offer wireless Internet services, alongside digital applications such as music, video and animation.
Some of the players even sell mobile handsets and accessories through a dealer network and offer co-billing services to other telecommunications service providers. Further, a few of these provide end-to-end software and services platforms for the Enterprise of Things, including computers, vehicles and similarly connected endpoints, within the enterprise.
Let’s take a look at the three major industry themes.
• The COVID-19 pandemic has led to a slowdown in economic activities around the world, and the wireless industry is no exception. The crisis, which has been gravely impacting the global economy, has compelled policymakers to look for ways to respond. Geographically, the wireless telecommunication services market is divided into seven key regions — North America, Latin America, Eastern Europe, Western Europe, Japan, Asia-Pacific, excluding Japan, and the Middle East & Africa. North America has the largest revenue share, followed by Europe and the Asia Pacific, thanks to breakthrough technological partnerships and easy adoption of avant-garde technologies by the population. Japan, the Middle East and Africa, and Latin America hold significant potential for growth in the market. That said, massive capital outlay to extend network infrastructure for 5G mobile connectivity and cut-throat competition is further pushing down prices, leading to lower aggregate ARPU. This has resulted in soft margins for most of the firms and induced volatility in earnings.
• The global wireless ecosystem has witnessed considerable growth on evolving customer needs and increasing smart device users to access real-time data. However, telecommunication networks require extensive, cost-intensive infrastructure. So their maintenance involves investment, capital and geographic reach that obstruct a number of companies from entering the industry arena. Frequent advancements in technology mean telecom companies must prepare for shorter upgrade cycles to bring the latest technology to the masses. Service providers must also continually increase their network capacities to handle more traffic, particularly due to today’s demand for data in developed and emerging markets. Adjacent market segments tend to offer lower margins, and disruptive competitors are well positioned in key segments such as cloud and advertising. These pose impediments for operators’ in-service portfolio expansion.
• Markets in developed economies have almost reached saturation levels, preventing carriers from achieving the subscriber growth rates of their counterparts in emerging economies. With the availability of new technologies, the quality of services from telecom companies has increased but profit margins have decreased. With millions of subscribers, a variety of new products, bundled and customized solutions, the operational support services have become more complex. The cost of handling these operations requires resources that have increased overhead costs. Providers need to upgrade their IT and connectivity infrastructures, as well as focus on providing data and voice services that are high quality, reliable and affordable. Security of the networks has become another priority for the companies. Thus, it seems that the industry might not be able to tide over the broader challenges in the near term.
Zacks Industry Rank Indicates Gloomy Prospects
The Zacks Wireless Non-US industry, which has 18 constituent companies, is housed within the broader Zacks Computer and Technology sector. It currently has a Zacks Industry Rank #167, which places it in the bottom 34% of more than 250 Zacks industries.
The group’s Zacks Industry Rank, which is the average of the Zacks Rank of all the member stocks, indicates dull near-term prospects. Interestingly, 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.
Now, the industry’s positioning in the bottom 50% of the Zacks-ranked industries is an outcome of a negative earnings outlook for the constituent companies. Looking at the aggregate earnings estimate revisions, it appears that analysts are losing faith in this group’s earnings growth potential. The industry’s earnings estimates for the current year and the next have decreased 24.9% and 26.2%, respectively, over the past year.
Before we present a few non-U.S. wireless stocks that are positioned to outperform the market (despite broader challenges) based on a healthy earnings outlook, let’s take a look at the industry’s recent stock-market performance and valuation picture.
Industry Underperforms Sector, S&P 500
The Zacks Wireless Non-US industry has underperformed both the broader Zacks Computer and Technology sector and the S&P 500 composite in the past year.
The industry has lost 19.2% against the S&P 500’s rise of 6.5%. Meanwhile, the broader sector has risen 26.6%.
One-Year Price Performance
Industry’s Current Valuation
Enterprise Value-to-EBITDA (EV/EBITDA) ratio is commonly used for valuing non-U.S. wireless stocks. The industry currently has a trailing 12-month EV/EBITDA of 8.59X compared with the S&P 500’s 11.84X. It is also trading below the sector’s trailing 12-month EV/EBITDA of 13.2X.
Over the past five years, the industry has traded as high as 23.18X, as low as 4.09X with the median of 15.13X, as the chart below shows.
Enterprise Value-to-EBITDA Ratio (Past Five Years)
Bottom Line
Telecom services typically show a weak correlation to macroeconomic factors as these are deemed to be necessities. Nevertheless, the wireless operators are weighed down by the churn rate in the face of dwindling voice- and text-revenues, leading to the disruptive rise of over-the-top service providers in this competitive and dynamic industry. The companies also face high depreciation charges due to a large fixed asset base. Price-sensitive competition for customer retention in core business will likely become more intense in the coming days. Right now, the impact of the coronavirus crisis is causing a short-term earnings recession due to supply-chain disruptions.
PLDT Inc. (PHI - Free Report) : Headquartered in Makati City, PLDT is a leading telecommunications provider in the Philippines. The Zacks Consensus Estimate for its current-year earnings has been revised 7.5% upward in the past 30 days. The stock has gained 28.8% in the past six months.
Price and Consensus: PHI
We are also presenting two stocks, with a Zacks Rank #2 (Buy) and a VGM Score of A, that investors might keep on their radar.
China Mobile Limited (CHL - Free Report) : Based in Central, Hong Kong, China Mobile provides mobile telecommunications and related services in Mainland China and Hong Kong. The consensus estimate for 2020 earnings has moved up 0.3% in the past 90 days. The stock has lost 16.5% in the past six months.
Price and Consensus: CHL
KT Corporation (KT - Free Report) : Headquartered in Seongnam, KT is South Korea’s largest telecommunications company. The consensus estimate for the ongoing-year earnings has moved 0.9% north in the past 90 days. The stock has depreciated 12.6% in the past six months. The company has a long-term earnings growth expectation of 11% compared with the industry’s 17.2%.
Price and Consensus: KT
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This outperformance has not just been a recent phenomenon. From 2000 – 2019, while the S&P averaged +6.0% per year, our top strategies averaged up to +54.7% per year.
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Wireless Non-US Industry Near-Term Outlook Appears Bleak
The Zacks Wireless Non-US industry comprises mobile telecommunications and related service providers based on foreign shores. The industry participants primarily offer voice services, including local, domestic and international calls and roaming services, prepaid and postpaid, as well as value-added services. These companies also offer wireless Internet services, alongside digital applications such as music, video and animation.
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Some of the players even sell mobile handsets and accessories through a dealer network and offer co-billing services to other telecommunications service providers. Further, a few of these provide end-to-end software and services platforms for the Enterprise of Things, including computers, vehicles and similarly connected endpoints, within the enterprise.
Let’s take a look at the three major industry themes.
• The COVID-19 pandemic has led to a slowdown in economic activities around the world, and the wireless industry is no exception. The crisis, which has been gravely impacting the global economy, has compelled policymakers to look for ways to respond. Geographically, the wireless telecommunication services market is divided into seven key regions — North America, Latin America, Eastern Europe, Western Europe, Japan, Asia-Pacific, excluding Japan, and the Middle East & Africa. North America has the largest revenue share, followed by Europe and the Asia Pacific, thanks to breakthrough technological partnerships and easy adoption of avant-garde technologies by the population. Japan, the Middle East and Africa, and Latin America hold significant potential for growth in the market. That said, massive capital outlay to extend network infrastructure for 5G mobile connectivity and cut-throat competition is further pushing down prices, leading to lower aggregate ARPU. This has resulted in soft margins for most of the firms and induced volatility in earnings.
• The global wireless ecosystem has witnessed considerable growth on evolving customer needs and increasing smart device users to access real-time data. However, telecommunication networks require extensive, cost-intensive infrastructure. So their maintenance involves investment, capital and geographic reach that obstruct a number of companies from entering the industry arena. Frequent advancements in technology mean telecom companies must prepare for shorter upgrade cycles to bring the latest technology to the masses. Service providers must also continually increase their network capacities to handle more traffic, particularly due to today’s demand for data in developed and emerging markets. Adjacent market segments tend to offer lower margins, and disruptive competitors are well positioned in key segments such as cloud and advertising. These pose impediments for operators’ in-service portfolio expansion.
• Markets in developed economies have almost reached saturation levels, preventing carriers from achieving the subscriber growth rates of their counterparts in emerging economies. With the availability of new technologies, the quality of services from telecom companies has increased but profit margins have decreased. With millions of subscribers, a variety of new products, bundled and customized solutions, the operational support services have become more complex. The cost of handling these operations requires resources that have increased overhead costs. Providers need to upgrade their IT and connectivity infrastructures, as well as focus on providing data and voice services that are high quality, reliable and affordable. Security of the networks has become another priority for the companies. Thus, it seems that the industry might not be able to tide over the broader challenges in the near term.
Zacks Industry Rank Indicates Gloomy Prospects
The Zacks Wireless Non-US industry, which has 18 constituent companies, is housed within the broader Zacks Computer and Technology sector. It currently has a Zacks Industry Rank #167, which places it in the bottom 34% of more than 250 Zacks industries.
The group’s Zacks Industry Rank, which is the average of the Zacks Rank of all the member stocks, indicates dull near-term prospects. Interestingly, 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.
Now, the industry’s positioning in the bottom 50% of the Zacks-ranked industries is an outcome of a negative earnings outlook for the constituent companies. Looking at the aggregate earnings estimate revisions, it appears that analysts are losing faith in this group’s earnings growth potential. The industry’s earnings estimates for the current year and the next have decreased 24.9% and 26.2%, respectively, over the past year.
Before we present a few non-U.S. wireless stocks that are positioned to outperform the market (despite broader challenges) based on a healthy earnings outlook, let’s take a look at the industry’s recent stock-market performance and valuation picture.
Industry Underperforms Sector, S&P 500
The Zacks Wireless Non-US industry has underperformed both the broader Zacks Computer and Technology sector and the S&P 500 composite in the past year.
The industry has lost 19.2% against the S&P 500’s rise of 6.5%. Meanwhile, the broader sector has risen 26.6%.
One-Year Price Performance
Industry’s Current Valuation
Enterprise Value-to-EBITDA (EV/EBITDA) ratio is commonly used for valuing non-U.S. wireless stocks. The industry currently has a trailing 12-month EV/EBITDA of 8.59X compared with the S&P 500’s 11.84X. It is also trading below the sector’s trailing 12-month EV/EBITDA of 13.2X.
Over the past five years, the industry has traded as high as 23.18X, as low as 4.09X with the median of 15.13X, as the chart below shows.
Enterprise Value-to-EBITDA Ratio (Past Five Years)
Bottom Line
Telecom services typically show a weak correlation to macroeconomic factors as these are deemed to be necessities. Nevertheless, the wireless operators are weighed down by the churn rate in the face of dwindling voice- and text-revenues, leading to the disruptive rise of over-the-top service providers in this competitive and dynamic industry. The companies also face high depreciation charges due to a large fixed asset base. Price-sensitive competition for customer retention in core business will likely become more intense in the coming days. Right now, the impact of the coronavirus crisis is causing a short-term earnings recession due to supply-chain disruptions.
One of the stocks in the industry currently sports a Zacks Rank #1 (Strong Buy) and has a VGM Score of B. You can see the complete list of today’s Zacks #1 Rank stocks here.
PLDT Inc. (PHI - Free Report) : Headquartered in Makati City, PLDT is a leading telecommunications provider in the Philippines. The Zacks Consensus Estimate for its current-year earnings has been revised 7.5% upward in the past 30 days. The stock has gained 28.8% in the past six months.
Price and Consensus: PHI
We are also presenting two stocks, with a Zacks Rank #2 (Buy) and a VGM Score of A, that investors might keep on their radar.
China Mobile Limited (CHL - Free Report) : Based in Central, Hong Kong, China Mobile provides mobile telecommunications and related services in Mainland China and Hong Kong. The consensus estimate for 2020 earnings has moved up 0.3% in the past 90 days. The stock has lost 16.5% in the past six months.
Price and Consensus: CHL
KT Corporation (KT - Free Report) : Headquartered in Seongnam, KT is South Korea’s largest telecommunications company. The consensus estimate for the ongoing-year earnings has moved 0.9% north in the past 90 days. The stock has depreciated 12.6% in the past six months. The company has a long-term earnings growth expectation of 11% compared with the industry’s 17.2%.
Price and Consensus: KT
Today's Best Stocks from Zacks
Would you like to see the updated picks from our best market-beating strategies? From 2017 through 2019, while the S&P 500 gained an impressive +53.6%, five of our strategies returned +65.8%, +97.1%, +118.0%, +175.7% and even +186.7%.
This outperformance has not just been a recent phenomenon. From 2000 – 2019, while the S&P averaged +6.0% per year, our top strategies averaged up to +54.7% per year.
See their latest picks free >>