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The Zacks Wireless Non-US industry comprises mobile telecommunication and allied service providers for consumer, enterprise and wholesale customers. The industry participants primarily offer leading-edge voice services, including local calls, domestic and international long-distance calls and roaming services, prepaid and postpaid, and value-added services. These companies also provide wireless Internet service, including digital applications such as music, video and animation, wireline broadband services and wireline voice services through wireline voice networks.
Some of the firms even sell various mobile handsets and accessories through dealer network and offers co-billing services to other telecommunication service providers. In addition, few of them offer an end-to-end software and services platform for the Enterprise of Things, including computers, vehicles, sensors, equipment and other connected endpoints within the enterprise.
Let’s take a look at three major themes in the industry —
• On a geographical basis, the wireless telecommunication services market is divided into seven key regions — North America, Latin America, Eastern Europe, Western Europe, Japan, Asia-Pacific, excluding Japan, and the Middle East & Africa. North America has the largest revenue share followed by Europe and Asia Pacific due to major technology partners based in these regions, and easy adoption of avant-garde technologies by the population. Japan, Middle East and Africa, and Latin America hold significant potential for growth in the market, raising demand for wireless services. However, markets in developed economies have mostly reached saturation levels, preventing wireless carriers from achieving the subscriber growth rates of their counterparts in emerging economies and leading them to focus on increasing average revenue per user (ARPU). High capital expenditure to extend network infrastructure for 5G mobile connectivity and cut-throat competition is further pushing down prices, leading to lower aggregate ARPU. These have led to soft margins for most of the firms and induced volatility in earnings.
• Over the past few years, the wireless service providers have been increasingly plagued by the churn rate in the face of dwindling voice- and text-revenues, leading to the disruptive rise of over-the-top service providers in this competitive and dynamic industry. A decisive challenge for these wireless operators as they expand service portfolios is that adjacent market segments often tend to offer lower margins, and competitors are well-positioned in key segments such as cloud and advertising. The companies mostly operate in a capital-intensive industry, incurring significantly high amount for technologically obsolescent offerings and R&D initiatives. They also face high depreciation charges due to large fixed asset base. In addition, strong U.S. dollars have strained margins and affected the cash flow. Moreover, a prolonged U.S.-China trade war has affected the global supply chain and unsettled the business model of various industry participants, forcing them to redraw their operations.
• It is worth noting that 4G LTE deployment and network upgrades continue to be the key trend worldwide at the moment, and in select markets, there is also investment in fixed broadband based on fiber. 5G developments have rather gained pace and will remain a key area of focus through 2019 and beyond. However, broader challenges arising from intense competitive pressure, accelerating cord-cutting trends in fixed-line voice and video, and the high levels of capital needed to support ongoing demand for data is at the fore. Further, price competition and financial policy risk remain key issues in Europe, while geopolitical risk prevails in the Middle East at present.
Zacks Industry Rank Indicates Gloomy Prospects
The Zacks Wireless Non-US industry is housed within the broader Zacks Computer and Technology sector. It currently carries a Zacks Industry Rank #236, which places it at the bottom 7% 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 near-term prospects. Interestingly, 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.
Now, the industry’s positioning in the bottom 50% of the Zacks-ranked industries is an outcome of negative earnings outlook for the constituent companies. Looking at the aggregate earnings estimate revisions, it appears that analysts are losing faith in this group’s earnings growth potential. The industry’s earnings estimates for fiscal 2019 have declined 16.5% over the past year, while the same for fiscal 2020 is down 20.3%.
Before we present a few non-U.S. wireless stocks that are well positioned to outperform the market (despite broader challenges) based on an upbeat earnings outlook, let’s take a look at the industry’s recent stock market performance and valuation picture.
Industry Underperforms Sector, S&P 500
The Zacks Wireless Non-US industry has underperformed both the broader Zacks Computer and Technology sector and the S&P 500 composite over the past year.
The industry has declined 6.6% over this period against the S&P 500’s rise of 7.2%. The broader sector has gained 4%.
One-Year Price Performance
Industry’s Current Valuation
Enterprise Value-to-EBITDA (EV/EBITDA) ratio is commonly used for valuing non-U.S. wireless stocks. The industry currently has a trailing 12-month EV/EBITDA of 9.17X compared with the S&P 500’s 11.29X. It is also trading below the sector’s trailing 12-month EV/EBITDA of 11.27X.
Over the past five years, the industry has traded as high as 21.6X, as low as 6.6X with the median of 13.3X, as the chart below shows.
Enterprise Value-to-EBITDA Ratio (Past Five Years)
Bottom Line
Telecom services usually show a weak correlation to macroeconomic factors because they are almost necessities. However, lower consumers’ discretionary income is likely to result in acceleration in video subscriber losses to cheaper online alternatives, decline in business revenues for cable, wireline and infrastructure providers, and postpaid wireless subscriber losses to prepaid. Among all these, the grave challenge for operators is tightening of credit market situations, which could lead to higher borrowing costs and elevated refinancing risk. Moreover, price-sensitive competition for customer retention in core business will likely become more intense in the coming days.
PLDT Inc. (PHI - Free Report) : Shares of this Makati City, the Philippines-based wireless firm have rallied 13.5% in the past year. The Zacks Consensus Estimate for the current-year earnings has been revised 19.7% upward over the past 60 days.
Price and Consensus: PHI
We are also presenting three stocks with a Zacks Rank #3 (Hold) that are well positioned to grow.
América Móvil, S.A.B. de C.V. (AMX - Free Report) : The consensus estimate for this Mexico City, Mexico-based wireless firm’s earnings has moved up 1% for the current fiscal year, over the past 30 days. The stock has returned 33.2% over the past three years. The company has long-term earnings growth expectation of 15.2%.
Price and Consensus: AMX
BlackBerry Limited (BB - Free Report) : Shares of this Waterloo, Canada-based wireless firm have gained 34.8% over the past three years. The Zacks Consensus Estimate for the current-year earnings has remained stable over the past 60 days. The company delivered average positive earnings surprise of 108.3% in the trailing four quarters.
Price and Consensus: BB
Mobile TeleSystems : The consensus estimate for this Moscow, Russia-based wireless firm’s earnings has remained stable for the current fiscal year, over the past 30 days. The stock has returned 17% over the past three years. The company has long-term earnings growth expectation of 3.7%.
Price and Consensus: MBT
More Stock News: This Is Bigger than the iPhone!
It could become the mother of all technological revolutions. Apple sold a mere 1 billion iPhones in 10 years but a new breakthrough is expected to generate more than 27 billion devices in just 3 years, creating a $1.7 trillion market.
Zacks has just released a Special Report that spotlights this fast-emerging phenomenon and 6 tickers for taking advantage of it. If you don't buy now, you may kick yourself in 2020.
Image: Bigstock
Wireless Non-US Industry's Near-Term Prospects Appear Bleak
The Zacks Wireless Non-US industry comprises mobile telecommunication and allied service providers for consumer, enterprise and wholesale customers. The industry participants primarily offer leading-edge voice services, including local calls, domestic and international long-distance calls and roaming services, prepaid and postpaid, and value-added services. These companies also provide wireless Internet service, including digital applications such as music, video and animation, wireline broadband services and wireline voice services through wireline voice networks.
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Some of the firms even sell various mobile handsets and accessories through dealer network and offers co-billing services to other telecommunication service providers. In addition, few of them offer an end-to-end software and services platform for the Enterprise of Things, including computers, vehicles, sensors, equipment and other connected endpoints within the enterprise.
Let’s take a look at three major themes in the industry —
• On a geographical basis, the wireless telecommunication services market is divided into seven key regions — North America, Latin America, Eastern Europe, Western Europe, Japan, Asia-Pacific, excluding Japan, and the Middle East & Africa. North America has the largest revenue share followed by Europe and Asia Pacific due to major technology partners based in these regions, and easy adoption of avant-garde technologies by the population. Japan, Middle East and Africa, and Latin America hold significant potential for growth in the market, raising demand for wireless services. However, markets in developed economies have mostly reached saturation levels, preventing wireless carriers from achieving the subscriber growth rates of their counterparts in emerging economies and leading them to focus on increasing average revenue per user (ARPU). High capital expenditure to extend network infrastructure for 5G mobile connectivity and cut-throat competition is further pushing down prices, leading to lower aggregate ARPU. These have led to soft margins for most of the firms and induced volatility in earnings.
• Over the past few years, the wireless service providers have been increasingly plagued by the churn rate in the face of dwindling voice- and text-revenues, leading to the disruptive rise of over-the-top service providers in this competitive and dynamic industry. A decisive challenge for these wireless operators as they expand service portfolios is that adjacent market segments often tend to offer lower margins, and competitors are well-positioned in key segments such as cloud and advertising. The companies mostly operate in a capital-intensive industry, incurring significantly high amount for technologically obsolescent offerings and R&D initiatives. They also face high depreciation charges due to large fixed asset base. In addition, strong U.S. dollars have strained margins and affected the cash flow. Moreover, a prolonged U.S.-China trade war has affected the global supply chain and unsettled the business model of various industry participants, forcing them to redraw their operations.
• It is worth noting that 4G LTE deployment and network upgrades continue to be the key trend worldwide at the moment, and in select markets, there is also investment in fixed broadband based on fiber. 5G developments have rather gained pace and will remain a key area of focus through 2019 and beyond. However, broader challenges arising from intense competitive pressure, accelerating cord-cutting trends in fixed-line voice and video, and the high levels of capital needed to support ongoing demand for data is at the fore. Further, price competition and financial policy risk remain key issues in Europe, while geopolitical risk prevails in the Middle East at present.
Zacks Industry Rank Indicates Gloomy Prospects
The Zacks Wireless Non-US industry is housed within the broader Zacks Computer and Technology sector. It currently carries a Zacks Industry Rank #236, which places it at the bottom 7% 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 near-term prospects. Interestingly, 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.
Now, the industry’s positioning in the bottom 50% of the Zacks-ranked industries is an outcome of negative earnings outlook for the constituent companies. Looking at the aggregate earnings estimate revisions, it appears that analysts are losing faith in this group’s earnings growth potential. The industry’s earnings estimates for fiscal 2019 have declined 16.5% over the past year, while the same for fiscal 2020 is down 20.3%.
Before we present a few non-U.S. wireless stocks that are well positioned to outperform the market (despite broader challenges) based on an upbeat earnings outlook, let’s take a look at the industry’s recent stock market performance and valuation picture.
Industry Underperforms Sector, S&P 500
The Zacks Wireless Non-US industry has underperformed both the broader Zacks Computer and Technology sector and the S&P 500 composite over the past year.
The industry has declined 6.6% over this period against the S&P 500’s rise of 7.2%. The broader sector has gained 4%.
One-Year Price Performance
Industry’s Current Valuation
Enterprise Value-to-EBITDA (EV/EBITDA) ratio is commonly used for valuing non-U.S. wireless stocks. The industry currently has a trailing 12-month EV/EBITDA of 9.17X compared with the S&P 500’s 11.29X. It is also trading below the sector’s trailing 12-month EV/EBITDA of 11.27X.
Over the past five years, the industry has traded as high as 21.6X, as low as 6.6X with the median of 13.3X, as the chart below shows.
Enterprise Value-to-EBITDA Ratio (Past Five Years)
Bottom Line
Telecom services usually show a weak correlation to macroeconomic factors because they are almost necessities. However, lower consumers’ discretionary income is likely to result in acceleration in video subscriber losses to cheaper online alternatives, decline in business revenues for cable, wireline and infrastructure providers, and postpaid wireless subscriber losses to prepaid. Among all these, the grave challenge for operators is tightening of credit market situations, which could lead to higher borrowing costs and elevated refinancing risk. Moreover, price-sensitive competition for customer retention in core business will likely become more intense in the coming days.
One stock in the space currently sports a Zacks Rank #1 (Strong Buy) that investors may consider betting on now due to healthy fundamentals. You can see the complete list of today’s Zacks #1 Rank stocks here.
PLDT Inc. (PHI - Free Report) : Shares of this Makati City, the Philippines-based wireless firm have rallied 13.5% in the past year. The Zacks Consensus Estimate for the current-year earnings has been revised 19.7% upward over the past 60 days.
Price and Consensus: PHI
We are also presenting three stocks with a Zacks Rank #3 (Hold) that are well positioned to grow.
América Móvil, S.A.B. de C.V. (AMX - Free Report) : The consensus estimate for this Mexico City, Mexico-based wireless firm’s earnings has moved up 1% for the current fiscal year, over the past 30 days. The stock has returned 33.2% over the past three years. The company has long-term earnings growth expectation of 15.2%.
Price and Consensus: AMX
BlackBerry Limited (BB - Free Report) : Shares of this Waterloo, Canada-based wireless firm have gained 34.8% over the past three years. The Zacks Consensus Estimate for the current-year earnings has remained stable over the past 60 days. The company delivered average positive earnings surprise of 108.3% in the trailing four quarters.
Price and Consensus: BB
Mobile TeleSystems : The consensus estimate for this Moscow, Russia-based wireless firm’s earnings has remained stable for the current fiscal year, over the past 30 days. The stock has returned 17% over the past three years. The company has long-term earnings growth expectation of 3.7%.
Price and Consensus: MBT
More Stock News: This Is Bigger than the iPhone!
It could become the mother of all technological revolutions. Apple sold a mere 1 billion iPhones in 10 years but a new breakthrough is expected to generate more than 27 billion devices in just 3 years, creating a $1.7 trillion market.
Zacks has just released a Special Report that spotlights this fast-emerging phenomenon and 6 tickers for taking advantage of it. If you don't buy now, you may kick yourself in 2020.
Click here for the 6 trades >>