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Near-Term Prospects for Wireless Equipment Industry Promising

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The Zacks Wireless Equipment industry primarily comprises companies that provide various networking solutions, wireless telecom products and related services for wireless voice and data communications through scalable modular platforms. The firms within this industry are driving the transition of global enterprises to smart virtual networks by creating an integrated 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, enable intrusion detection and thwart data theft for seamless data transfer.

The industry participants facilitate users to shift their telecom networks to the latest 5G standards — including new use cases like IoT, public safety and fixed wireless access. Along with hands-on field service operations to remote network operations, the firms offer IT managed services for the management of applications and data centers, while network design and optimization services develop and expand user networks per demand. Apart from offering 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 to the defense industry. A few industry participants 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 need 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 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 broaden customer base, translating into higher revenues for the overall industry.

•    The impending 5G boom is likely to propel the industry to newer heights. Per the latest report by the Cellular Telecommunications Industry Association, which represents the U.S. wireless communications industry, both the United States and China are currently on equal footing for 5G readiness. This represents a marked improvement from 2018 when the United States was trailing way behind China and South Korea. This was reportedly made possible through continued investments from the industry and a prod from the top policymakers to update networks faster. With a holistic top-down approach, the United States was able to expedite the process to set up the required infrastructure and back it up with testing and launching of early networks in key locations. 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 IoT services. These include connected cars, augmented reality and virtual reality platform, smart cities and connected devices that will revolutionize key industry verticals. Moreover, 5G 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 constant 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 #40, which places it at the top 16% 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 35.8% since October 2018, the same for 2020 has improved 84.3% over the past year.

Before we present a few wireless equipment 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 Wireless Equipment industry has outpaced the broader Zacks Computer and Technology sector and the S&P 500 composite over the past year.

The industry has improved 18.6% over this period compared with the S&P 500 and sector’s rally of 5.1% and 3.6%, 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 26.7X compared with the S&P 500’s 10.6X. It is also above the sector’s trailing-12-month EV/EBITDA of 10.9X.

Over the past five years, the industry has traded as high as 26.7X and as low as 10.6X and at the median of 15X, 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 5G and massive proliferation of data traffic. However, issues related to the trade war and prospects of a renewed tariff regime are latent threats for it.

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 two stocks with Zacks Rank #2 (Buy) that are well positioned to grow.

Ericsson (ERIC - Free Report) : Founded in 1876 and headquartered in Stockholm, Sweden, this wireless equipment manufacturer has gained a healthy 17.1% in the past year. The Zacks Consensus Estimate for current fiscal-year earnings for this Zacks Rank #1 stock has moved up 76.2% in the past year.

Price and Consensus: ERIC

Juniper Networks, Inc. (JNPR - Free Report) : Headquartered in Sunnyvale, CA, this Zacks Rank #2 wireless equipment manufacturer has gained 1.3% in the past year. The Zacks Consensus Estimate for the current and next fiscal-year earnings has remained steady for the past couple of months.

Price and Consensus: JNPR

Harris Corporation HRS: Headquartered in Melbourne, FL, this Zacks Rank #2 wireless equipment manufacturer has gained 14.5% in the past year. The Zacks Consensus Estimate for the current and next fiscal-year earnings has moved up 4.3% each in the past year.

Price and Consensus: HRS

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