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Near-Term Wireless Equipment Industry Outlook Appears Murky

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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 software and services to manage them. Their product portfolio encompasses integrated circuit devices (chips) and system software for wireless voice and data communications, analog and digital two-way radio, 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. Some notable firms within the industry are Qualcomm Incorporated (QCOM - Free Report) , Juniper Networks Inc. (JNPR - Free Report) and Motorola Solutions Inc. (MSI - Free Report) .

Here are the three major themes in the industry:

•    With the exponential growth 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 demand for state-of-the-art wireless products and services. Also, the industry participants are likely to benefit from expanding media coverage, improving customer service and competitive cost structure, thereby generating higher average revenue per user. Increasing demand for reliable access and fast-data services are further expected to broaden customer base, translating into higher revenues for the overall industry.

•    The continued deployment of 5G technology across the globe is likely to propel the industry to newer heights. 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. However, trade hostilities related to tariffs and counter tariffs by two of the most powerful economic powerhouses of the world have dented the profitability of the industry, and shrouded it in uncertainty. Tense Sino-U.S. relations have also affected the supply chain management of various firms and led to loss of businesses due to several trade restrictions.

Overall, although the industry has inherent growth potential, tense bilateral trade relations between the United States and China have rendered a relatively grim picture for the near future.

Zacks Industry Rank Indicates Bleak Prospects

The Zacks Wireless Equipment industry is housed within the broader Zacks Computer and Technology sector. It carries a Zacks Industry Rank #169, which places it at the bottom 34% 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 discouraging 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 bottom 50% of the Zacks-ranked industries is a result of negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are losing faith in this group’s earnings growth potential. While the industry’s earnings estimates for the current year have decreased 6.2% over the past year, the same for 2020 has declined 46.8%.

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 Lags Sector and S&P 500

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

The industry has declined 2.6% over this period against the S&P 500 and sector’s rally of 2.7% and 1.6%, 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 20X compared with the S&P 500’s 11.2X. It is also above the sector’s trailing-12-month EV/EBITDA of 11.1X.

Over the past five years, the industry has traded as high as 25.5X and as low as 10.1X and at the median of 14.9X, as the chart below shows.

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

Bottom Line

The industry is likely to benefit from increased 5G deployment and massive proliferation of data traffic in the long run. However, issues related to the trade war and prospects of a renewed tariff regime have clouded the near-term growth prospects of the industry.

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.

PC-Tel, Inc. (PCTI - Free Report) : Founded in 1994 and headquartered in Bloomingdale, IL, this wireless equipment manufacturer has gained an impressive 70.9% in the past year. The Zacks Consensus Estimate for 2019 earnings for this Zacks Rank #1 stock has moved up 412.5% in the past year, while that for 2020 has surged 200%.

Price and Consensus: PCTI

Nokia Corporation (NOK - Free Report) : Founded in 1865 and headquartered in Espoo, Finland, this Zacks Rank #2 wireless equipment manufacturer has gained 2.2% in the past three months. The Zacks Consensus Estimate for current-year earnings has jumped 12.5% in the past three months.

Price and Consensus: NOK

Viasat, Inc. (VSAT - Free Report) : Founded in 1986 and headquartered in Carlsbad, CA, this Zacks Rank #2 wireless equipment manufacturer has gained 24.5% in the past year. The Zacks Consensus Estimate for current-year earnings has moved up 14.3% since April 2019.

Price and Consensus: VSAT

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