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3 Non-US Wireless Stocks That are Braving Industry Challenges

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Companies in the Zacks Wireless Non-US industry are finding it increasingly difficult to upgrade their network infrastructure and focus on providing high quality and affordable services. These wireless carriers are weighed down by the growing churn rate and dwindling revenues with the disruptive rise of over-the-top service providers. The corporations face high depreciation charges due to a large fixed asset base.

Nevertheless, companies like America Movil, S.A.B. de C.V. (AMX - Free Report) , Vodafone Group Plc (VOD - Free Report) and SK Telecom Co., Ltd (SKM - Free Report) are benefiting from the deployment of advanced 4G LTE and 5G technologies and proliferation of data traffic.

Industry Description

The Zacks Wireless Non-US industry comprises mobile telecommunications and broadband service providers that are based on foreign shores. These companies primarily offer voice services, including local, domestic and international calls, roaming services, and prepaid and postpaid. They provide value added services, such as Internet of Things (IoT) comprising logistics and fleet management and automotive and health solutions. They also offer content streaming, interactive applications, wireless security services and mobile payment solutions. Some of the industry players sell mobile handsets and accessories through dealer networks and offer co-billing services to other telecommunications service providers. These firms provide IT solutions and cable and satellite pay television subscriptions as well as data services and hosting services to residential and corporate clients.

What's Shaping the Future of Wireless Non-US Industry

Aggressive Competition to Persist: Telecom services typically show a weak correlation to macroeconomic factors as these are deemed to be necessities. That said, the wireless operators have been facing severe challenges due to the growing churn rate and declining average revenue per user, along with the disruptive rise of over-the-top service providers in this competitive and dynamic industry. Price-sensitive competition for customer retention in the core business is expected to become more intense in the coming days. The companies follow an aggressive promotional strategy to increase penetration in the smartphone market. However, these efforts tend to affect profitability in the near term. Mobile operators also need to take measures to reduce costs and optimize business operations. Aggressive competition could limit their ability to attract and retain customers and might affect operating and financial results. The impact of the pandemic is causing short-term earnings dilution, largely due to supply-chain disruptions.

High Infrastructure Costs Weigh on Margins: The telecommunications industry continues to undergo significant changes driven by technological enhancements. However, one of the biggest challenges is the growing need for capital expenditure. Rising demand will put pressure on operators to invest more in scalable infrastructure and Internet-driven facilities that can support increased traffic and provide quality data services. With the availability of new technologies, the telecom companies’ quality of services has improved but their profit margins have contracted. With millions of subscribers and a variety of new products, operational support services have become more complex. The cost of handling these operations requires resources that increase overheads. Service 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 companies. Massive capital outlay to expand network infrastructure for 5G mobile connectivity is limiting bottom-line growth.

Market Saturation Remains a Concern: 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 and Africa. Markets in developed economies have almost reached saturation levels, preventing carriers from achieving the subscriber growth rates of their counterparts in emerging economies. So operators need to shift their focus from developed markets to emerging economies where there are greater opportunities for expansion of mobile network connections. Success in the wireless service business largely depends on technical superiority, quality of services and scalability. In a saturated wireless market, spectrum crunch has become a major issue. Most of the operators are finding it difficult to manage mobile data traffic, which is growing by leaps and bounds. The situation has become even more acute with the growing popularity of smart devices and rising online mobile video streaming.

Zacks Industry Rank Indicates Gloomy Prospects

The Zacks Wireless Non-US industry, which has 14 constituent companies, is housed within the broader Zacks Computer and Technology sector. It currently has a Zacks Industry Rank #232, which places it in the bottom 8% 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 weak near-term 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 an outcome of a negative earnings outlook for the constituent companies. Looking at the aggregate earnings estimate revisions, it appears that analysts are losing confidence in this group’s earnings growth potential. The industry’s earnings estimates for the next year have decreased 1% in the past three months.

Before we present a few non-US wireless stocks that you may want to consider for your portfolio, 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 9.1% over this period against the S&P 500’s rise of 37% and the broader sector’s gain of 39.8%.

One-Year Price Performance

Industry's Current Valuation

The Enterprise Value-to-EBITDA (EV/EBITDA) is commonly used for valuing wireless stocks. The industry currently has a trailing 12-month EV/EBITDA of 7.67X compared with the S&P 500’s 16.28X. It is also trading below the sector’s trailing 12-month EV/EBITDA of 16.88X.

Over the past five years, the industry has traded as high as 22.72X, as low as 3.88X with a median of 9.46X, as the chart below shows.

Enterprise Value-to-EBITDA Ratio (Past Five Years)

3 Non-US Wireless Stocks to Watch

America Movil: Based in Mexico, America Movil provides telecommunication services in Latin America and globally. The company is working on the development of alternatives to reap more benefits from its tower assets while increasing shareholders value and reducing debt. It offers customers a portfolio of value added services and enhanced communications solutions in 25 countries in Latin America, the United States and Central and Eastern Europe. The company leveraged the investments it made over the past years in new technologies that enhanced the capacity and reach of its platforms, enabling it to handle significant traffic increases with no detriment to quality or speed. It is expected to benefit from a growing subscriber base and focused 5G efforts, going forward. The Zacks Consensus Estimate for its current-year earnings has been revised 29% upward over the past 60 days. The stock has returned 32.2% in the past year. America Movil currently 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: AMX

Vodafone Group: Based in Newbury, the U.K., Vodafone Group engages in telecommunication services in Europe and globally. The company operates mobile and fixed networks in 21 countries and partners with mobile networks in 49 more. Its M-Pesa technology platform in Africa enables more than 48 million people to benefit from access to mobile payments and financial services. The company has nearly 315 million mobile customers, 28 million fixed broadband customers, 22 million TV customers and connects more than 123 million IoT devices. The consensus estimate for its current-year earnings has been stable over the past seven days. The stock has jumped 6.6% in the past year. Vodafone is a Zacks Rank #3 stock.

Price and Consensus: VOD

SK Telecom: Headquartered in Seoul, SK Telecom provides wireless telecommunication services in South Korea and globally. Together with its affiliates, the company operates diverse Information and Communications Technology (ICT) businesses from telecommunication businesses to new ICT businesses including media, security, IoT and mobility. With capabilities in 5G, AI, Big Data analysis and quantum cryptography communications, SK Telecom is strengthening its position as a global ICT leader. The consensus estimate for its current-year earnings has been revised 1.2% upward over the past 60 days. The stock has gained 44.5% in the past year. SK Telecom is a Zacks Rank #3 stock.

Price and Consensus: SKM

In-Depth Zacks Research for the Tickers Above

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America Movil, S.A.B. de C.V. (AMX) - free report >>

Vodafone Group PLC (VOD) - free report >>

SK Telecom Co., Ltd. (SKM) - free report >>

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