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3 Communication Stocks Poised to Tide Over Industry Challenges
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The Zacks Diversified Communication Services industry appears to be struggling with waning profits due to high capital expenditures for continuous 5G infrastructure upgrades, unpredictable raw material prices, supply-chain disruptions amid geopolitical tensions, unstable oil prices, intense market volatility and high customer inventory levels. However, the industry is likely to benefit in the long run from advancing 6G research and increased fiber densification.
Amid this backdrop, Chunghwa Telecom Co., Ltd. (CHT - Free Report) , Liberty Global Ltd. (LBTYA - Free Report) and Vivendi SE (VIVHY - Free Report) should benefit from higher demand for scalable infrastructure for seamless connectivity amid the wide proliferation of IoT and the transition to cloud.
Industry Description
The Zacks Diversified Communication Services industry comprises firms that provide a wide array of communication services, including wireless, wireline and Internet, to business enterprises and consumers. These companies offer mobile and wireline telephone services, high-speed Internet, direct-to-home satellite television and other value-added services. In addition to providing integrated information and communications technology services to businesses and governments, some of these companies operate as local exchange carriers or full-service providers of data center colocation and related managed services in state-of-the-art data center facilities. Some industry participants also provide IP networks, private lines, network management and hosting services, along with sales, installation and maintenance of major branded IT and telephony equipment.
What's Shaping the Future of the Diversified Communication Services Industry?
Inflated Input Costs: Although the supply chain woes have declined progressively, the industry continues to face a dearth of chips, which are the building blocks for various equipment used by telecom carriers. Moreover, high raw material prices due to the Iran war, shipping restrictions in the Strait of Hormuz, soaring energy prices, inflation and economic sanctions against the Putin regime have affected the operation schedules of several firms. Extended lead times for basic components are also likely to hurt the delivery schedule and escalate production costs. The demand-supply imbalance has crippled operations and affected profitability due to high equipment prices.
Waning Demand: Efforts to offset substantial capital expenditure for upgrading network infrastructure by raising fees have reduced demand, as customers tend to switch to lower-priced alternatives. Moreover, local-line access for traditional telephony services continues to decline among large customers due to higher wireless substitution and migration to IP-based services. This is reflected in the persistent erosion of overall network access services year over year, hurting revenues of local and long-distance operations. In addition, a shift toward wireless services and the aggressive rollout of VoIP and long-distance services by Tier-1 competitors have resulted in access line erosion. These adverse impacts have become more pronounced with the Middle East tensions and the prolonged Russia-Ukraine war.
Integrated Service Bouquet: To improve profitability, the companies are increasingly focusing on providing support services to various small and mid-sized businesses (SMBs) with an integrated portfolio of voice, data and technology services. The firms are tailoring their services to suit individual business needs and helping SMBs better adapt to necessary technology advancements. At the same time, the industry is battling hard-to-mitigate operating risks stemming from volatility in demand, an unpredictable business environment and challenging geopolitical scenarios by offering free services to low-income families and seamless wireless connectivity to the masses.
Shrinking Profits: Video and other bandwidth-intensive applications have witnessed exponential growth owing to the wide proliferation of smartphones and increased deployment of the superfast 5G technology. This has forced the industry participants to invest considerably in LTE, broadband and fiber to provide additional capacity and ramp up the Internet and wireless networks. These companies are rapidly transforming themselves 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 continue to focus 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. Although these infrastructure investments are likely to be beneficial in the long run, short-term profitability has largely been compromised.
Zacks Industry Rank Indicates Bearish Prospects
The Zacks Diversified Communication Services industry is housed within the broader Zacks Utilities sector. It carries a Zacks Industry Rank #186, which places it in the bottom 25% of 247 Zacks industries.
The group’s Zacks Industry Rank, which is the average of the Zacks Rank of all the member stocks, indicates bleak 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.
Before we present a few diversified communication stocks that are well-positioned to outperform the market based on a relatively modest 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 Diversified Communication Services industry has lagged the S&P 500 composite and the broader Zacks Utilities sector over the past year due to macroeconomic headwinds.
The industry has declined 13.8% over this period against the S&P 500’s and the sector’s growth of 14.2% and 3.8%, 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 6.92X compared with the S&P 500’s 16.62X. It is also trading below the sector’s trailing 12-month EV/EBITDA of 14.81X.
Over the past five years, the industry has traded as high as 10.5X, as low as 6.03X and at the median of 7.38X, as the chart below shows.
Trailing 12-Month Enterprise Value-to EBITDA (EV/EBITDA) Ratio
3 Diversified Communication Services Stocks to Buy
Chunghwa: Headquartered in Taipei City, Taiwan, Chunghwa is the largest carrier in Taiwan. It offers cutting-edge connectivity technologies, including fiber optics, low Earth orbit satellites, 5G/6G, generative artificial intelligence (AI) fields and quantum technologies for accelerating the development of various intelligent emerging applications and research and leading the way in the AI field and its applications. Chunghwa aims to utilize the All-Photonics Network technology for the development of an innovative and sustainable society with a high-capacity, low-latency, low-power network environment. The stock has gained 16.6% over the past year. Chunghwa currently carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Price and Consensus: CHT
Liberty Global: Based in Hamilton, Liberty Global is an international provider of broadband Internet, video, fixed-line telephony and mobile communications services to residential customers and businesses in Europe through three platforms: Liberty Telecom, Liberty Growth and Liberty Services. The company is demonstrating improved operational momentum across its core markets, indicating a recovery in underlying business fundamentals and sustainable growth. LBTYA currently has a Zacks Rank #2. It has a VGM Score of B.
Price and Consensus: LBTYA
Vivendi: Headquartered in Paris, France, Vivendi operates as a diversified content, media and communications group. The company functions as an integrated group committed to transforming its businesses to meet the expectations of the public and contribute to building more open, inclusive and responsible societies. Vivendi has a Zacks Rank #2 at present.
View the Zacks #1 Rank List
Image: Bigstock
3 Communication Stocks Poised to Tide Over Industry Challenges
The Zacks Diversified Communication Services industry appears to be struggling with waning profits due to high capital expenditures for continuous 5G infrastructure upgrades, unpredictable raw material prices, supply-chain disruptions amid geopolitical tensions, unstable oil prices, intense market volatility and high customer inventory levels. However, the industry is likely to benefit in the long run from advancing 6G research and increased fiber densification.
Amid this backdrop, Chunghwa Telecom Co., Ltd. (CHT - Free Report) , Liberty Global Ltd. (LBTYA - Free Report) and Vivendi SE (VIVHY - Free Report) should benefit from higher demand for scalable infrastructure for seamless connectivity amid the wide proliferation of IoT and the transition to cloud.
Industry Description
The Zacks Diversified Communication Services industry comprises firms that provide a wide array of communication services, including wireless, wireline and Internet, to business enterprises and consumers. These companies offer mobile and wireline telephone services, high-speed Internet, direct-to-home satellite television and other value-added services. In addition to providing integrated information and communications technology services to businesses and governments, some of these companies operate as local exchange carriers or full-service providers of data center colocation and related managed services in state-of-the-art data center facilities. Some industry participants also provide IP networks, private lines, network management and hosting services, along with sales, installation and maintenance of major branded IT and telephony equipment.
What's Shaping the Future of the Diversified Communication Services Industry?
Inflated Input Costs: Although the supply chain woes have declined progressively, the industry continues to face a dearth of chips, which are the building blocks for various equipment used by telecom carriers. Moreover, high raw material prices due to the Iran war, shipping restrictions in the Strait of Hormuz, soaring energy prices, inflation and economic sanctions against the Putin regime have affected the operation schedules of several firms. Extended lead times for basic components are also likely to hurt the delivery schedule and escalate production costs. The demand-supply imbalance has crippled operations and affected profitability due to high equipment prices.
Waning Demand: Efforts to offset substantial capital expenditure for upgrading network infrastructure by raising fees have reduced demand, as customers tend to switch to lower-priced alternatives. Moreover, local-line access for traditional telephony services continues to decline among large customers due to higher wireless substitution and migration to IP-based services. This is reflected in the persistent erosion of overall network access services year over year, hurting revenues of local and long-distance operations. In addition, a shift toward wireless services and the aggressive rollout of VoIP and long-distance services by Tier-1 competitors have resulted in access line erosion. These adverse impacts have become more pronounced with the Middle East tensions and the prolonged Russia-Ukraine war.
Integrated Service Bouquet: To improve profitability, the companies are increasingly focusing on providing support services to various small and mid-sized businesses (SMBs) with an integrated portfolio of voice, data and technology services. The firms are tailoring their services to suit individual business needs and helping SMBs better adapt to necessary technology advancements. At the same time, the industry is battling hard-to-mitigate operating risks stemming from volatility in demand, an unpredictable business environment and challenging geopolitical scenarios by offering free services to low-income families and seamless wireless connectivity to the masses.
Shrinking Profits: Video and other bandwidth-intensive applications have witnessed exponential growth owing to the wide proliferation of smartphones and increased deployment of the superfast 5G technology. This has forced the industry participants to invest considerably in LTE, broadband and fiber to provide additional capacity and ramp up the Internet and wireless networks. These companies are rapidly transforming themselves 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 continue to focus 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. Although these infrastructure investments are likely to be beneficial in the long run, short-term profitability has largely been compromised.
Zacks Industry Rank Indicates Bearish Prospects
The Zacks Diversified Communication Services industry is housed within the broader Zacks Utilities sector. It carries a Zacks Industry Rank #186, which places it in the bottom 25% of 247 Zacks industries.
The group’s Zacks Industry Rank, which is the average of the Zacks Rank of all the member stocks, indicates bleak 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.
Before we present a few diversified communication stocks that are well-positioned to outperform the market based on a relatively modest 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 Diversified Communication Services industry has lagged the S&P 500 composite and the broader Zacks Utilities sector over the past year due to macroeconomic headwinds.
The industry has declined 13.8% over this period against the S&P 500’s and the sector’s growth of 14.2% and 3.8%, 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 6.92X compared with the S&P 500’s 16.62X. It is also trading below the sector’s trailing 12-month EV/EBITDA of 14.81X.
Over the past five years, the industry has traded as high as 10.5X, as low as 6.03X and at the median of 7.38X, as the chart below shows.
Trailing 12-Month Enterprise Value-to EBITDA (EV/EBITDA) Ratio
3 Diversified Communication Services Stocks to Buy
Chunghwa: Headquartered in Taipei City, Taiwan, Chunghwa is the largest carrier in Taiwan. It offers cutting-edge connectivity technologies, including fiber optics, low Earth orbit satellites, 5G/6G, generative artificial intelligence (AI) fields and quantum technologies for accelerating the development of various intelligent emerging applications and research and leading the way in the AI field and its applications. Chunghwa aims to utilize the All-Photonics Network technology for the development of an innovative and sustainable society with a high-capacity, low-latency, low-power network environment. The stock has gained 16.6% over the past year. Chunghwa currently carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Price and Consensus: CHT
Liberty Global: Based in Hamilton, Liberty Global is an international provider of broadband Internet, video, fixed-line telephony and mobile communications services to residential customers and businesses in Europe through three platforms: Liberty Telecom, Liberty Growth and Liberty Services. The company is demonstrating improved operational momentum across its core markets, indicating a recovery in underlying business fundamentals and sustainable growth. LBTYA currently has a Zacks Rank #2. It has a VGM Score of B.
Price and Consensus: LBTYA
Vivendi: Headquartered in Paris, France, Vivendi operates as a diversified content, media and communications group. The company functions as an integrated group committed to transforming its businesses to meet the expectations of the public and contribute to building more open, inclusive and responsible societies. Vivendi has a Zacks Rank #2 at present.
Price and Consensus: VIVHY