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Prospects Look Healthy for Communication Components Industry

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The Zacks Communication - Components industry primarily comprises companies that provide diverse telecom products and services for the development of scalable network architecture, demand-driven video solutions and broadband access equipment. These include various building blocks such as small cells, routers and antennas that are incorporated into equipment and facilities, and are subsequently utilized by service providers to build networks for end users. Their product portfolio encompasses optical and copper connectivity products, hybrid fiber-coaxial equipment, edge routers, metro Wi-Fi, storage and distribution equipment for cable TV operators, cable and DSL modems, EMTAs (Embedded Multimedia Terminal Adapter), gateways and set-top boxes.

Some firms within the industry also offer cloud networking and virtualization solutions for data centers and cloud computing environments along with end-to-end network visibility and analytics that help build, test, certify, maintain and optimize complex physical and virtual networks. Some industry firms offer innovative audio products, including analog and digital microphones and balanced armature speakers, audio processors, and software and algorithms that are used in applications that serve the mobile, ear and IoT markets. A few industry participants even provide glass substrates that are commonly found in LCD TVs, notebooks and flat-panel desktop PC monitors, ceramic substrates for mobile, emission control systems, filter plates for genomics, centrifuge tubes and laboratory filtration products. In addition, some firms offer digital platform for hands-free communication via secure text messaging, alert and alarm management that effectively solve healthcare communication and workflow challenges.

A couple of leading stocks within the industry are Arista Networks, Inc. (ANET - Free Report) and Corning Incorporated (GLW - Free Report) .

Here are the three major themes in the industry:

•    Telecom service providers are increasingly leaning toward fiber optic cable in order to meet the burgeoning demand for cloud-based business data and video-streaming services by individuals. Moreover, fiber-optic cable network is vital for backhaul and last mile local loop, which are required by wireless service providers for the deployment of 5G network. Fiber networks are also essential for the growing deployment of small cells that bring the network closer to the user, and supplement macro networks to provide extensive coverage. Higher utilization of advanced routers to deliver data packets from one network to another is gaining prominence, while state-of-the-art antenna systems remain essential architectural components for seamless connectivity. The 5G transition is expected to be disruptive in nature, potentially creating new avenues for industries across the board. 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 telecom firms are facilitating its customers to move away from an economy-of-scale network operating model to demand-driven operations by offering easy programmability and flexible automation. The industry remains well poised to meet these evolving trends, given its technology prowess, product depth and wide applications.

•    The industry participants are transforming the entertainment experience through a holistic approach to content delivery in order to help providers anticipate demand for more personalized, relevant and mobile experiences. Voice-powered interactions are fast emerging as a critical and necessary feature as consumers tend to engage with technology through natural, spoken commands across the mobile, ear and IoT platforms. This has led to a wide array of products ranging from mobile phones to headsets, and from smart speakers to household appliances. Moreover, the firms offer a variety of pathways for delivering services through a combination of network-based video transcoding, packaging, storage and compression technologies required to deliver new IP video formats and home gateways to connected devices inside and outside home. Some firms are also benefiting from the expanding cloud networking market, primarily driven by strong demand for scalable infrastructure, which has become necessary for new applications and services. Apart from delivering high capacity and availability, cloud networking promises predictable performance along with programmability that enables integration with third-party applications for network, management, automation, orchestration and network services.

•    Consumer demand for faster Internet speeds with more capacity continues to grow at an escalating rate, primarily driven by increasing consumption of video. The wide proliferation of cloud networking solutions is further resulting in increased storage and computing on a virtual plane. Since both consumers and enterprises are using the network more, there is tremendous demand for quality networking equipment. Moreover, demand for faster data transfer is fueling growth of optical networks. The industry participants provide the technology to enable customers manage this exponential bandwidth-development cost effectively through steady investments in state-of-the-art technologies. These include DOCSIS (Data Over Cable Service Interface Specification), DSL (Digital Subscriber Line) and Next Generation PON (Passive Optical Network) platforms that enable service providers to deliver the highest bandwidth to subscribers across any physical connection. Further, some firms within the industry are benefiting from innovations in the glass substrate market, enabling panel manufacturers to do away with costs that are usually necessary for making slimmer, lighter and more power-efficient consumer devices.

Overall, the industry appears poised to benefit from healthy growth dynamics, favorable industry drivers and solid demand trends.

Zacks Industry Rank Indicates Encouraging Prospects

The Zacks Communication - Components industry is housed within the broader Zacks Computer and Technology sector. It carries a Zacks Industry Rank #105, which places it at the top 41% 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. The industry’s earnings estimates for 2019 have jumped 4.2% over the past year.

Before we present a few communication components 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 Communication - Infrastructure industry has outpaced the broader Zacks Computer and Technology sector as well as the S&P 500 composite over the past year, largely due to healthy demand trends.

The industry has rallied 7.5% over this period compared with the S&P 500 and sector’s rise of 4.7% and 5%, respectively.

One Year Price Performance

Industry’s Current Valuation

On the basis of trailing 12-month price-to-book (P/B) ratio, the industry is currently trading at 3.16X compared with the S&P 500’s 4.01X. It is also below the sector’s trailing-12-month P/B of 4.44X.

Over the past five years, the industry has traded as high as 3.50X and as low as 1.03X and at the median of 1.64X, as the chart below shows.

Trailing 12-Month price-to-book (P/B) Ratio (Chart)

Bottom Line

With gradual deployment of 5G technologies, fiber optics and massive proliferation of data traffic, the industry boasts inherent growth potential. However, issues related to the trade war remain a latent threat.

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

UTStarcom Holdings Corp (UTSI - Free Report) : Based in Admiralty, Hong Kong, this communication components manufacturer has gained a modest 10.4% year to date. The Zacks Consensus Estimate for current fiscal-year earnings for this Zacks Rank #1 stock has moved up 40% in the past 90 days.

Price and Consensus: UTSI

Communications Systems, Inc. (JCS - Free Report) : Headquartered in Minnetonka, MN, this communication components manufacturer has gained a stellar 107.4% year to date. The Zacks Consensus Estimate for current fiscal-year earnings for this Zacks Rank #2 stock has moved up 700% since May this year.

Price and Consensus: JCS

SeaChange International, Inc. (SEAC - Free Report) : Founded in 1993 and headquartered in Acton, MA, this communication components manufacturer has gained a solid 121.4% year to date. The Zacks Consensus Estimate for current fiscal-year earnings for this Zacks Rank #2 stock has moved up 91.7% over the past 90 days.

Price and Consensus: SEAC

Turtle Beach Corporation (HEAR - Free Report) : Headquartered in San Diego, CA, this Zacks Rank #2 communication components manufacturer delivered a trailing 12-month positive earnings surprise of 104.9%. The Zacks Consensus Estimate for the current fiscal-year and next fiscal-year earnings has moved up 18.1% and 11.1%, respectively, since March this year.

Price and Consensus: HEAR

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