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Near-Term Outlook for Wireless Equipment Industry Appears Rosy

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The Zacks Wireless Equipment industry primarily comprises companies that provide various wireless telecom products and services for wireless voice and data communications as well as global positioning system tracking. These companies are driving the transition of global enterprises into smart virtual networks by creating a single network for all services, converging mobile and fixed broadband, IP routing and optical networks with the software and services to manage them.

Their product portfolio encompasses analog and digital two-way radio, voice and data communications products and systems for private networks, wireless broadband systems and end-to-end enterprise mobility solutions. In addition, the firms provide a broad range of routing, switching and security products that secure VPN appliances, intrusion detection and prevention appliances, and wide area network optimization platforms.

Apart from scalable networks that securely connect everyone and everything to the cloud, the firms help customers transform their operations and reduce the complexity of business. Some firms within the industry even provide electronic warfare, avionics, robotics, advanced communications and maritime systems for the defense industry. A few industry participants also offer air traffic management solutions for the civil aviation industry and analytics for global and space situational awareness and Earth observation missions.

Here are the three major themes in the industry:

•    With the emergence of the Smartphone market and subsequent usage of mobile broadband, user demand for coverage speed and quality has increased manifold. This has resulted in growing demand for advanced networking architecture, in turn, leading service providers to spend more on routers and switches. Hence, these companies are likely to benefit from the higher spending pattern among carriers to upgrade their networks to support the incremental growth in data traffic. Further, to maintain superior performance as traffic increases, there is also a continuous need for network tuning and optimization, creating a sublime demand for state-of-the-art wireless products and services. At the same time, the industry participants focus on leveraging expanding media coverage, improving customer service and achieving a competitive cost structure to generate higher average revenue per user and attract new customers. Increasing demand for reliable access and fast-data services are expected to expand customer base.

•    The impending 5G boom is likely to propel the industry to newer heights. 5G is billed as the technology of the future with faster download speed and seamless transfer of data. Leveraging state-of-the-art communication network architectures, 5G is touted to be the primary catalyst for next-generation Internet of Things (IoT) services. These include connected cars coupled with augmented reality and virtual reality platform, smart cities and connected devices that revolutionize key industry verticals. Moreover, 5G technology is likely to augment the scalability, security and universal mobility of the telecommunications industry, which is expected to propel the wide proliferation of IoT. The industry participants are facilitating its customers to move away from an economy-of-scale network operating model to demand-driven operations and seamlessly migrate to 5G by offering easy programmability and flexible automation. Rollouts of next-generation 5G networks are anticipated to improve market conditions significantly in 2019 and beyond.

•    A majority of the industry participants offers mission-critical communication infrastructure, devices, accessories, software and services that enable its customers to run businesses with increased efficiency and safety for their mobile workforce. These systems drive demand for additional device sales, software upgrades, infrastructure refresh and expansion, as well as additional services to maintain, monitor and manage these complex networks and solutions. The comprehensive suite of services ensures continuity and reduces risks for continued critical communications operations. One of the primary markets that most of the industry firms serves is Enterprise, which comprises large businesses; federal, state and local governments; and research and education institutions. This ensures a steady revenue stream for most of these companies despite an inherent risk related to budgetary allocations.

Overall, the industry appears to be poised to benefit from healthy growth dynamics, favorable industry drivers and solid demand trends.

Zacks Industry Rank Indicates Bullish Prospects

The Zacks Wireless Equipment industry is housed within the broader Zacks Computer and Technology sector. It carries a Zacks Industry Rank #16, which places it at the top 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 encouraging prospects. Our research shows that the top 50% of the Zacks-ranked industries outperforms 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 positive earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts have reposed faith in this group’s earnings growth potential. While the industry’s earnings estimates for the current year have increased 4.9% over the past year, the same for 2019 has improved 34.2% during the same time frame.

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 Sector and S&P 500

The Zacks Communication - Infrastructure Industry has outpaced the broader Zacks Utilities Sector as well as the S&P 500 composite over the past year.

The industry has improved 8.6% over this period against the S&P 500 and sector’s decline of 1% and 2.9%, respectively.

One Year Price Performance

Industry’s Current Valuation

On the basis of 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 16.2X compared with the S&P 500’s 10.21X. It is also above the sector’s trailing-12-month EV/EBITDA of 9.68X.

Over the past five years, the industry has traded as high as 19.68X and as low as 12.82X and at the median of 14.58X, as the chart below shows.

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

Bottom Line

The industry remains well poised to benefit from healthy growth dynamics with the ushering of 5G technologies and massive proliferation of data traffic. However, issues related to the trade war remain a latent threat for the industry.

Three of the stocks in the space currently sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here. We are also presenting another stock with a Zacks Rank #2 (Buy) that is well positioned to grow.

QUALCOMM Incorporated (QCOM - Free Report) : Headquartered in San Diego, CA, this wireless equipment manufacturer has long-term earnings growth expectations of 10.9% and a trailing four-quarter average positive surprise of 18.5%. The Zacks Consensus Estimate for next fiscal-year earnings for this Zacks Rank #1 stock has moved up 21.9% in the past year.

Price and Consensus: QCOM

Ericsson (ERIC - Free Report) : Founded in 1876 and headquartered in Stockholm, Sweden, this wireless equipment manufacturer has gained a robust 41.3% in the past year. The Zacks Consensus Estimate for current fiscal-year earnings for this Zacks Rank #1 stock has moved up 64.7% in the past year.

Price and Consensus: ERIC

Ubiquiti Networks, Inc. (UBNT - Free Report) : Headquartered in New York, NY, this Zacks Rank #1 wireless equipment manufacturer has gained a solid 68.4% in the past year. The Zacks Consensus Estimate for the current and next fiscal-year earnings has moved up 8.1% and 24.3% in the past year, respectively.

Price and Consensus: UBNT

Harris Corporation (HRS - Free Report) : Headquartered in Melbourne, FL, this Zacks Rank #2 wireless equipment manufacturer has gained a modest 5.1% in the past year. The Zacks Consensus Estimate for the current and next fiscal-year earnings has moved up 13.4% and 12.3% in the past year, respectively.

Price and Consensus: HRS (Chart 6)

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