Communication - Infrastructure industry appears to be mired in demand volatility as consumers tend to switch to low-priced alternatives to offset the economic adversities stemming from the coronavirus pandemic. Moreover, paucity of demand owing to various trade restrictions and margin erosion due to price wars have dented the industry’s profitability. Nevertheless, Calix, Inc. ( CALX Quick Quote CALX - Free Report) , ADTRAN, Inc. ( ADTN Quick Quote ADTN - Free Report) and DASAN Zhone Solutions, Inc. ( DZSI Quick Quote DZSI - Free Report) are likely to benefit in the long run from higher demand for scalable infrastructure for seamless connectivity amid wide proliferation of IoT, driven by faster pace of 5G deployment.
The Zacks Communication - Infrastructure industry comprises companies that provide various infrastructure solutions for the core, access and edge layers of communication networks. These firms support mission-critical, high-bandwidth applications like cloud-based computing, video, mobile and machine-to-machine connectivity. Leveraging proprietary modeling and simulation techniques to optimize networks, the firms offer high-speed network access solutions for use across Internet protocol, asynchronous transfer mode and time division multiplexed architecture in both wireline and wireless network applications to leading global telecom operators, multi-system operators and enterprise customers. Their product portfolio encompasses optical fiber and twisted pair structured cable solutions, infrastructure management hardware and software, network racks and cabinets, and fiber-to-home equipment like hardened connector systems, couplers and splitters, and hardened optical terminating enclosures.
In addition, some firms provide materials for cellular base station sites and connectivity; indoor, small cell and distributed antenna wireless systems; and wireless network backhaul planning and optimization products and services to improve cellular coverage and capacity in high-traffic areas and places difficult for networks to penetrate. Certain firms within the industry provide data center infrastructure solutions that include colocation space and power, and interconnection services to various enterprise, cloud, carrier and content customers.
What’s Shaping the Future of the Communication - Infrastructure Industry? With exponential growth in video and other bandwidth-intensive applications owing to the wide proliferation of smartphones and increased deployment of superfast 5G technology, the industry participants are making considerable investments in LTE, broadband and fiber in order to provide additional capacity and ramp up Internet and wireless networks. As a result, these companies are rapidly transforming from legacy copper-based telecommunications firms to technology powerhouses with capabilities to meet the growing demand for flexible data, video, voice and IP solutions. At the same time, the industry participants are focusing on leveraging wireline momentum, expanding media coverage, improving customer service and achieving a competitive cost structure to generate higher average revenue per user, while attracting new customers. All these efforts have particularly helped firms in the industry to cater to the surge in data demand, with digital sustainability becoming the norm of the day as majority of the population is forced to work from home to avoid being exposed to the deadly virus. Evolution With Changing Demand Patterns: The success of 5G hinges on substantial investments to upgrade infrastructure in the core fiber backhaul network to support anticipated growth in data services. With operators moving toward converged or multi-use network structures, combining voice, video and data communications into a single network, the industry is increasingly developing solutions to support wireline and wireless network convergence. Although these investments will eventually help minimize service delivery costs to adequately support broadband competition, rural coverage and wireless densification, short-term profitability has largely been compromised. The industry's near-term prospects also remain vulnerable to several factors like risks of disruption from extreme weather and the growing menace of cyberattacks. Efforts to build resilient infrastructure facilities to withstand natural catastrophes have further bumped up operating costs. Short-Term Profitability Compromised: Lack of demand due to geopolitical uncertainty and the challenging macroeconomic environment have dented margins of most industry participants. Intense price wars due to rising costs of raw materials and stiff competition have added to the woes. Consumer acceptance of alternative communications technologies such as coaxial cable through cable/multiple system operators, and cellular-based wireless services has further strained margins. This has become even more pronounced with the persistent erosion in demand as consumers tend to shift to low-priced alternatives. High technological obsolescence of most products has also escalated operating costs, with continuous investments in R&D. Moreover, various trade restrictions imposed on the sale of communication equipment to China-based firms due to national security risks have dented the industry's credibility and led to loss of some businesses, further hampering overall demand. Paucity of Demand:
Zacks Industry Rank Indicates Bearish Trends
The Zacks Communication - Infrastructure industry is housed within the broader Zacks
Computer and Technology sector. It carries a Zacks Industry Rank #239, which places it at the bottom 6% 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 bleak 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 bottom 50% of the Zacks-ranked industries is a result of negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are losing confidence in this group’s earnings growth potential. In the past year, the industry’s earnings estimates for the current fiscal year have declined 41.9%, while that for the next fiscal is down 47.7%. Before we present a few communication infrastructure 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 Outperforms S&P 500 & Sector
The Zacks Communication - Infrastructure industry has outperformed the broader Zacks Computer and Technology sector as well as the S&P 500 composite over the past year.
The industry has risen 72.9% over this period compared with the S&P 500 and the sector’s rise of 17.1% and 39.5%, respectively. One Year Price Performance
Industry’s Current Valuation
On the basis of the trailing 12-month enterprise value-to EBITDA (EV/EBITDA) ratio, which is the most appropriate multiple for valuing telecom stocks, the industry is currently trading at 9.28X compared with the S&P 500’s 16.79X. It is also below the sector’s trailing-12-month EV/EBITDA of 16.37X.
Over the past five years, the industry has traded as high as 11.79X, as low as 6.69X and at the median of 8.67X, as the chart below shows. Trailing 12-Month enterprise value-to EBITDA (EV/EBITDA) Ratio
3 Communication - Infrastructure Stocks to Keep a Close Eye on Calix, Inc.: Headquartered in San Jose, CA, Calix offers copper- and fiber-based broadband services to residential and commercial customers. With deeper penetration of Calix Cloud – an analytics platform that leverages network data and subscriber behavioral data for key insights, and higher adoption of its software platform, the company is witnessing solid traction. The Zacks Consensus Estimate for its current-year earnings has been revised 335% upward over the past year, while that for the next year is up 107.5%. The company plans to upgrade its portfolio to better address increasing demand for work-from-home solutions. Significant tailwind from continued adoption of Calix Cloud, AXOS, and EXOS remain key growth drivers. The stock carries a Zacks Rank #3 (Hold) and has gained a stellar 289.2% in the past year. You can see . With a the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here VGM Score of B, it delivered a positive earnings surprise of 72.2%, on average, in the trailing four quarters. Price and Consensus: CALX ADTRAN, Inc.: Headquartered in Huntsville, AL, ADTRAN designs, manufactures, markets and services network access solutions for communication networks. Its solutions are used to deploy new broadband networks and upgrade slower, established networks using copper, fiber, and wireless technologies, both in the United States and abroad. The stock has gained 52.8% in the past year. The Zacks Consensus Estimate for the company’s current-year earnings has been revised 23.5% upward over the past year, while that for the next year is up 173.3%. The company has enabled service providers to leverage the ADTRAN Mosaic Software-Defined Access architecture that combines modern Web-scale technologies with open-source platforms to facilitate rapid innovation in multi-technology, multi-vendor environments. Thanks to the latest fiber access advancements on the back of favorable competitive factors, the Network Solutions segment is likely to perform well in the upcoming quarters. ADTRAN expects solid traction in its domestic markets for ultra-broadband and Fiber-To-The-Home solutions, with a gradual pickup in capital spending in Tier-1, Tier-2 and regional service provider market segments. The stock carries a Zacks Rank #2 (Buy) and has a positive earnings surprise of 132.3%, on average, for the trailing four quarters. Price and Consensus: ADTN DASAN Zhone Solutions, Inc.: Founded in 1996 and based in Plano, TX, DASAN offers network access solutions and communications platforms for service provider and enterprise networks in the United States, Canada, Latin America, Europe, the Middle East, Africa, Korea, and other Asia Pacific Countries. The company is likely to benefit from the secular trend of 5G deployment across the globe with healthy traction in the fiber LAN ecosystem. The stock has gained 83.9% over the past year. The Zacks Consensus Estimate for its current-year earnings has been revised 138.5% upward since July-end, while that for the next year is up 21.1% since August. Telenor’s Asian markets have seen an unprecedented rate of mobile data growth in the recent past. With better visibility and solid order trends, the company is aiming to gain cost efficiencies and introduce new products to the market. The stock carries a Zacks Rank #3 and delivered a positive earnings surprise of 83.2%, on average, in the trailing four quarters. Price and Consensus: DZSI