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3 Wireless Stocks Set to Sail Against the Ailing Industry

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The Zacks Wireless National industry appears to be mired in high capital expenditures for infrastructure upgrades, margin woes, supply-chain disruptions amid the prolonged Russia-Ukraine war and Israel-Hamas conflict, soft China market conditions and high customer inventory levels. However, the industry is likely to benefit in the long run from an accelerated 5G rollout and increased fiber densification.

In this backdrop, T-Mobile US Inc. (TMUS - Free Report) , United States Cellular Corporation (USM - Free Report) and ATN International, Inc. (ATNI - Free Report) are likely to gain from higher demand for scalable infrastructure for seamless network connectivity with a wide proliferation of IoT, wireless traction and solid broadband momentum.

Industry Description

The Zacks Wireless National industry primarily comprises firms that provide a comprehensive range of communication services and business solutions. These include wireless, wireline, local exchange, long-distance calls, data/broadband and Internet, video, managed networking, messaging, wholesale and cloud-based services to retail consumers. The firms within the industry also offer IP-based voice and data services, targeted advertising, television, streaming content, cable networks and publishing operations, multiprotocol label switching networking, fiber optic long-haul networks and hosting and communications systems to businesses and government agencies. In addition, the firms provide edge computing services that allow businesses to route application-specific traffic where required and are most effective — whether in the cloud, the network, or on their premises.

What's Shaping the Future of the Wireless National Industry?

Demand Erosion for Legacy Services: Increased infrastructure spending for network upgrades has largely compromised short-term margins. Aggressive promotional expenses, lucrative discounts and the adoption of several low-priced service plans to attract and retain customers are eroding profits. A steady decline in linear TV subscribers and legacy services due to a challenging macroeconomic environment and high inflation adds to the margin woes. Consequently, the firms within the industry are increasingly seeking diversification from legacy telecom services to more business, enterprise and wholesale opportunities. The companies are making significant investments to upgrade their network and product portfolio, including considerable advances in software-defined, wide-area network capabilities and a new Cloud Core architecture.

Improved 5G Coverage & Fiber Densification: Most industry participants are deploying the latest 4G LTE Advanced technologies to deliver higher peak data speeds and capacity, driven by customer-focused planning, disciplined engineering and investments for infrastructure upgrades. The companies are also expanding their fiber optic networks to support 4G LTE and 5G wireless standards. Further, leading firms within the industry have been deploying the C-Band spectrum to gain additional coverage. These mid-band airwaves offer significant bandwidth with better propagation characteristics for optimum coverage in rural and urban areas compared with mmWave. As the 5G ecosystem evolves, customers are expected to experience significant enhancements in coverage and speed.

Escalated Production Costs: The industry is facing a shortage of chips, which are the building blocks for various equipment used by telecom carriers. Uncertainty regarding chip shortage and supply-chain disruptions leading to a dearth of essential fiber materials, shipping delays and scarcity of other raw materials are likely to affect the expansion and rollout of new broadband networks. Extended lead times for basic components are also expected to adversely impact the delivery schedule and escalate production costs. Moreover, high raw material prices due to the Israel-Hamas conflict, soft market conditions in China, the prolonged Russia-Ukraine war and the consequent economic sanctions against the Putin regime have affected the operation schedule of various firms.

Focus on Higher Efficiencies: The industry participants are realigning their wireless network toward a software-centric model to cater to increasing business demands and customer needs through remote facilities. The industry players are focused on bringing improved operational efficiencies through network simplification and rationalization, thereby boosting end-to-end provisioning time and driving standardization. Moreover, the firms are offering a variety of pathways for delivering services through a combination of network-based video transcoding, packaging, storage and compression technologies to offer new IP video formats, live TV, streaming services and home gateways to connected devices inside and outside the home.

Zacks Industry Rank Indicates Bleak Prospects

The Zacks Wireless National industry is housed within the broader Zacks Computer and Technology sector. It carries a Zacks Industry Rank #222, which places it in the bottom 9% 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 dull 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.

Before we present a few wireless national 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 S&P 500, Sector

The Zacks Wireless National industry has lagged the S&P 500 composite and the broader Zacks Computer and Technology sector over the past year.

The industry has lost 1.8% over this period against the S&P 500 and the sector’s growth of 22.2% and 46.7%, respectively.

One Year Price Performance

Industry's Current Valuation

On the basis of the trailing 12-month enterprise value-to-EBITDA (EV/EBITDA), which is the most appropriate multiple for valuing telecom stocks, the industry is currently trading at 7.76X compared with the S&P 500’s 13.8X. It is also below the sector’s trailing 12-month EV/EBITDA of 13.27X.

Over the past five years, the industry has traded as high as 8.93X, as low as 5.46X and at the median of 7.04X, as the chart below shows.

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

3 Wireless National Stocks to Watch

T-Mobile: Headquartered in Bellevue, WA, T-Mobile is a national wireless service provider. The company offers services under the T-Mobile, Metro by T-Mobile and Sprint brands. The Zacks Consensus Estimate for current-year earnings has been revised 8.2% upward over the past year, while that for the next year is up 10.4% over the same time frame. T-Mobile is benefiting from industry-leading postpaid customer growth with a record-low churn rate. The company’s dedicated 5G spectrum assets with superior propagation and a strong emphasis on customer experience are supporting the top line. Its Ultra Capacity 5G network is powered by the mid-band 2.5 GHz spectrum, which delivers superfast speed, covers 300 million people and ensures a superior 5G experience. The stock has gained 13.6% over the past year. T-Mobile 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: TMUS

US Cellular: Headquartered in Chicago, IL, U.S. Cellular is the fourth largest full-service wireless carrier in the United States. The company provides a range of wireless products and services, and a high-quality network to increase the competitiveness of local businesses and improve the efficiency of government operations. U.S. Cellular is expanding its footprint while adopting unlimited plans to enhance average revenue per user. The company has a mid-band spectrum in almost all of its operating markets. The Zacks Consensus Estimate for current-year earnings has been revised 8.2% upward over the past year. It has a VGM Score of A. This Zacks Rank #3 stock has gained 125% over the past year.

Price and Consensus: USM

ATN International: Headquartered in Beverly, MA, ATN International offers digital infrastructure and communications services with a focus on rural and remote markets. The company is progressing steadily with its “Glass-and-Steel” network expansion strategy and is gradually moving away from the legacy wireless wholesale business. The acquisition of Sacred Wind Enterprises by Commnet Broadband, which is a wholly owned subsidiary of ATN International, is likely to extend its regional footprint with a complementary portfolio. It is aiming to focus more on the rural markets to augment its leading position with support from government stimulus programs for broadband deployment in under-served areas. This Zacks Rank #3 stock has a VGM Score of B.

Price and Consensus: ATNI

See More Zacks Research for These Tickers

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United States Cellular Corporation (USM) - free report >>

ATN International, Inc. (ATNI) - free report >>

T-Mobile US, Inc. (TMUS) - free report >>

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