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Communication Components Industry Outlook: Prospects Healthy

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The Zacks Communication - Components industry primarily comprises companies that provide diverse telecom products and services for the development of advanced cable telephony, next-generation high-speed data network, demand-driven video solutions and broadband access equipment. These include various building blocks such as small cells, routers and antennas that are incorporated into equipment and facilities, and are subsequently utilized by service providers to build networks for end users. Their product portfolio encompasses hybrid fiber-coaxial equipment, edge routers, metro Wi-Fi, storage and distribution equipment for cable TV operators, cable and DSL modems, EMTAs (Embedded Multimedia Terminal Adapter), gateways and set-top boxes.

Some firms within the industry also offer cloud networking solutions for data centers and cloud computing environments. A few industry participants even provide glass substrates that are commonly found in LCD TVs, notebooks and flat-panel desktop PC monitors, ceramic substrates for mobile, emission control systems, filter plates for genomics, centrifuge tubes and laboratory filtration products. In addition, some industry participants offer digital platform for hands-free communication via secure text messaging, alert and alarm management that effectively solve healthcare communication and workflow challenges.

Here are the three major themes in the industry:

•    Telecom service providers are increasingly leaning toward fiber optic cable in order to meet the burgeoning demand for cloud-based business data and video-streaming services by individuals. Moreover, fiber-optic cable network is vital for backhaul and last mile local loop, which are required by wireless service providers for their upcoming 5G network. 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. Higher utilization of advanced routers to deliver data packets from one network to another is gaining prominence, while state-of-the-art antenna systems remain essential architectural components for seamless connectivity.

•    The industry participants are transforming the entertainment experience through a holistic approach to content delivery in order to help providers anticipate demand for more personalized, relevant and mobile experiences. Moreover, the firms offer a variety of pathways for delivering services through a combination of network-based video transcoding, packaging, storage and compression technologies required to deliver new IP video formats and home gateways to connected devices inside and outside home. Some firms are also benefiting from the expanding cloud networking market primarily driven by strong demand for scalable infrastructure, which has become a necessity to support new applications and services. Apart from delivering high capacity and availability, cloud networking promises predictable performance along with programmability that enables integration with third-party applications for network, management, automation, orchestration and network services.

•    Consumer demand for faster Internet speeds with more capacity continues to grow at an escalating rate, primarily driven by increasing consumption of video. The industry participants provide the technology to enable customers manage this exponential bandwidth growth cost effectively through steady investments in state-of-the-art technologies like DOCSIS, DSL and Next Generation PON (Passive Optical Network) to ensure that the products are enabling service providers to deliver the highest amount of bandwidth to their subscribers across any physical connection. Further, some firms within the industry are benefiting from innovations in the glass substrate market, enabling panel manufacturers to do away with thinning costs that are usually necessary for making slimmer, lighter and more power-efficient consumer devices.

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 Communication - Components industry is housed within the broader Zacks Computer and Technology sector. It carries a Zacks Industry Rank #98, which places it at the top 39% 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 2018 have increased 7.5% since October-end, the same for 2019 has improved 41% over the past year.

Before we present a few communication components 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 Sector and S&P 500

The Zacks Communication - Infrastructure Industry has lagged the broader Zacks Utilities Sector as well as the S&P 500 composite over the past year, largely due to issues related to the prolonged trade war.

The industry has declined 9.7% over this period compared with the S&P 500 and sector’s fall of 5.7% and 8.8%, 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 9.32X compared with the S&P 500’s 10.07X. It is also below the sector’s trailing-12-month EV/EBITDA of 9.56X.

Over the past five years, the industry has traded as high as 10.32X and as low as 8.26X and at the median of 9.55X, as the chart below shows.

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

Bottom Line

The industry is well poised to benefit from healthy growth dynamics with the launch of 5G technologies, increased market traction of fiber optics and massive proliferation of data traffic. However, issues related to the trade war remain a latent threat.

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

Altice USA, Inc. (ATUS - Free Report) : Based in Long Island City, NY, this communication components manufacturer has a trailing four-quarter average positive surprise of 54.2%. The Zacks Consensus Estimate for next fiscal-year earnings for this Zacks Rank #1 stock has moved up 25.5% in the past year.

Price and Consensus: ATUS

Acacia Communications, Inc. (ACIA - Free Report) : Founded in 2009 and headquartered in Maynard, MA, this communication components manufacturer has gained a modest 15.1% in the past year. The Zacks Consensus Estimate for current fiscal-year earnings for this Zacks Rank #2 stock has moved up 55.8% since October 2018.

Price and Consensus: ACIA

Harmonic Inc. (HLIT - Free Report) : Headquartered in San Jose, CA, this Zacks Rank #2 communication components manufacturer has gained a solid 25.6% in the past year. The Zacks Consensus Estimate for the next fiscal-year earnings has moved up a stellar 187.5% in the past year.

Price and Consensus: HLIT

Turtle Beach Corporation (HEAR - Free Report) : Headquartered in San Diego, CA, this Zacks Rank #2 communication components manufacturer has gained a phenomenal 702.1% in the past year. The Zacks Consensus Estimate for the current fiscal-year earnings has moved up an astronomical 6525% in the past year.

Price and Consensus: HEAR

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