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Prospects Appear Promising for Wireless Non-US Industry

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The Zacks Wireless Non-US industry comprises mobile telecommunications and allied service providers primarily based in foreign shores. The industry participants mainly offer leading-edge voice services, including local, domestic and international calls and roaming services, prepaid and postpaid, as well as value-added services. These companies also provide wireless Internet service, alongside digital applications such as music, video and animation.

Some of the firms even sell various mobile handsets and accessories through dealer network and offer co-billing services to other telecommunication service providers. In addition, few of them offer 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 —

•    The global wireless telecommunications ecosystem has witnessed considerable growth driven by rapid technological advancements, evolving customer needs and increasing smart device usage to access real time data. Wireless carriers across national territories have expanded their service portfolios to include a wide array of offerings to capitalize on growth opportunities in technology, media and telecommunications in areas such as enterprise cloud, TV, IoT, augmented and virtual reality, and autonomous vehicles. However, adjacent market segments tend to offer lower margins, and disruptive competitors are well positioned in key segments such as cloud and advertising. These pose impediments for operators in service portfolio expansion.

•    Broad-based industry growth is expected over the next five years as carriers complete 5G superfast network rollouts and benefit from the burgeoning demand for data services. The majority of wireless subscription addition has stemmed from emerging markets, particularly India, China, Japan and Africa. Markets in developed economies have mostly reached saturation levels, preventing carriers from achieving the subscriber growth rates of their counterparts in emerging economies, forcing them to focus on higher average revenue per user (ARPU). Latin American countries such as Brazil, Mexico and Argentina are also slated to offer significant opportunities as the degree of penetration of high-speed broadband, 4G services and the usage of smartphones rise. Markedly, 4G LTE deployment and network upgrades are the key trend around the world at present, and in select markets there is also massive investment in fixed broadband based on fiber. 5G developments have gained pace and will continue to be a key area of focus through 2019 and beyond.

•    Region wise, 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 and Africa. North America holds the largest revenue share followed by Europe and Asia Pacific owing to major technology providers based in these regions, and easy adoption of these 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, high capital expenditure to extend network infrastructure for mobile connectivity and cut-throat competition is forcing down prices, leading to aggregate lower ARPU for operators.

Zacks Industry Rank Indicates Bright Prospects

The Zacks Wireless Non-US industry, which has 18 constituent companies, is housed within the broader Zacks Computer and Technology sector. It currently carries a Zacks Industry Rank #107, which places it at the top 42% 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 healthy near-term 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 an outcome of positive earnings outlook for the constituent companies. Looking at the aggregate earnings estimate revisions, it appears that analysts have gained confidence in this group’s earnings growth potential. The industry’s earnings estimates for 2019 have been raised 0.7% in the past two months.

Before we present a few non-U.S. wireless stocks that are well positioned to outperform the market based on a healthy 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 8.3% over this period against the S&P 500’s rise of 10.2%. The broader sector has gained 11.3%.

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 6.82X compared with the S&P 500’s 11.29X. It is also trading below the sector’s trailing 12-month EV/EBITDA of 11.14X.

Over the past five years, the industry has traded as high as 23.16X, as low as 6.51X with the median of 15.02X, as the chart below shows.

Enterprise Value-to-EBITDA Ratio (Past Five Years)

Bottom Line

Despite short-term headwinds like trade restrictions, the industry is expected to witness robust growth on the back of improving macroeconomic and geopolitical scenario, technological advancements and rise in consumers’ disposable income. This apart, the vast population base of multiple countries, particularly China, India and Japan, coupled with rapid proliferation of smart devices and Internet users will be the key factor driving growth of the telecommunications market worldwide. However, price-sensitive competition for customer retention in core business is likely to become more intense in the coming days.

Two stocks in the landscape currently sport a Zacks Rank #1 (Strong Buy) that investors may consider betting on now. You can see the complete list of today’s Zacks #1 Rank stocks here.

TIM Participações S.A. (TSU - Free Report) : The consensus estimate for this Rio de Janeiro, Brazil-based wireless firm’s earnings has moved up 34.2% for the current year over the past 90 days. The company has long-term earnings growth expectation of 5.9%.

Price and Consensus: TSU

NTT DOCOMO, INC. (DCMYY - Free Report) : Shares of this Tokyo, Japan-based wireless firm have gained 23.8% in the past year. The Zacks Consensus Estimate for the current-year earnings has moved up 7.2% over the past 90 days.

Price and Consensus: DCMYY

We are also presenting a stock currently carrying a Zacks Rank #2 (Buy) that is well positioned to grow.

SK Telecom Co.,Ltd (SKM - Free Report) : The Zacks Consensus Estimate for this Seoul, South Korea-based wireless firm’s current-year earnings has remained stable over the past 30 days.

Price and Consensus: SKM

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