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Wireless National Stock Outlook Portrays Bullish Sentiments

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The Zacks Wireless National industry primarily comprises companies that provide a comprehensive range of communication and business solutions. These include wireless, local exchange, long-distance, data/broadband and Internet, video, managed networking, wholesale and cloud-based services. The firms within the industry offer IP-based voice and data services, multiprotocol label switching networking, data center and managed services, hosting and communications systems to businesses and government agencies. In addition, the firms provide edge computing services that allow businesses to route application-specific traffic to where they need it and where it’s most effective — whether in the cloud, the network or on their premises.

Few firms within the industry offer targeted advertising services, leveraging data insights to reach specific audiences in trusted, premium content environments. Some even provide film, television, cable networks and publishing operations with significant media assets in their portfolio. Few industry participants further offer wireless devices, such as smartphones, tablets and other mobile communication devices and accessories manufactured by various suppliers. Prominent players within this landscape include Verizon Communications Inc. VZ, AT&T Inc. (T - Free Report) , T-Mobile US Inc. TMUS and CenturyLink Inc. CTL.

Here are the three major themes in the industry:

•    The firms within the industry are increasingly seeking diversification from legacy telecom services to more business, enterprise and wholesale opportunities. Consequently, the companies are making significant investments to upgrade network and product portfolio, including considerable advances in software-defined wide area network capabilities and a new Cloud Core architecture. This is realigning the wireless network toward a software-centric model to meet increasing business demands and customer needs. The companies are focused on bringing improved operational efficiencies through network simplification and rationalization, thereby improving end-to-end provisioning time and driving standardization. Also, the firms are offering the flexibility to better manage data traffic by leveraging indigenous software-defined network to enable low-latency, high-bandwidth applications for faster access to data processing. Utilizing machine learning techniques and more connected devices, these are likely to transform the way data-intensive images and videos are transferred across the industry on a real-time basis.

•    Most of the industry participants are deploying the latest 4G LTE Advanced technologies to deliver faster peak data speeds and capacity, driven by customer-focused planning, disciplined engineering and investments for infrastructure upgrade. The companies are also expanding their fiber optics networks to support 4G LTE and 5G wireless standards as well as wireline connections. Fiber-optic cable network is vital for backhaul and last mile local loop, which are required by wireless service providers for 5G deployment. 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. Further, leading firms within the industry have already launched next-generation 5G wireless residential broadband services in multiple U.S. markets, while full-phased commercial 5G wireless services are likely to be offered in 2020. As the 5G ecosystem evolves, customers are expected to experience significant enhancements in coverage, speeds and devices.

•    The industry participants are taking a holistic approach to content delivery in order to help providers anticipate demand for more personalized, relevant and mobile experiences. Moreover, the firms are offering a variety of pathways for delivering services through a combination of network-based video transcoding, packaging, storage and compression technologies to deliver new IP video formats, streaming services and home gateways to connected devices inside and outside home. In addition, some sector firms are reinventing online advertising by pooling a unique set of assets — valuable consumer data and insights, advanced advertising capabilities and engaged passionate fanbases. This has led to a faster turnaround of advertising campaigns, enabling marketers to access and understand the efficacy of these messages in weeks instead of months. These, in turn, are giving a new dimension to their business models.

Overall, the industry appears poised to benefit from healthy growth dynamics, favorable factors and inherent sector strength.

Zacks Industry Rank Indicates Upbeat Prospects

The Zacks Wireless National industry is housed within the broader Zacks Computer and Technology sector. It carries a Zacks Industry Rank #84, which places it at the top 33% 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 estimate for 2019 has improved 2.5% over the past year, while that for 2020 is up 2.1%.

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 Lags Sector, S&P 500

The Zacks Wireless National industry has lagged the broader Zacks Computer and Technology sector and the S&P 500 composite over the past year, despite higher pace of 5G deployment and underlying solid growth potential, largely due to tariff headwinds.

The industry has rallied 11.6% over this period compared with the S&P 500 composite and sector’s rise of 13.4% and 18.4%, 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 6.4X compared with the S&P 500’s 11.23X. It is also below the sector’s trailing-12-month EV/EBITDA of 11.36X.

Over the past five years, the industry has traded as high as 11.59X and as low as 5.97X and at the median of 6.68X, as the chart below shows.

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

Bottom Line

The industry is well poised to benefit from the continued deployment of 5G technologies, fiber optics and massive proliferation of data traffic. However, issues related to the trade war remain a latent threat, although broad-based expectations of the imminent signing of the “Phase One” deal portray optimism about a likely long-term solution.

One stock in the space currently carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Verizon Communications Inc. (VZ): Based in New York, NY, this wireless national telecom service provider has gained a modest 5.5% year to date. The Zacks Consensus Estimate for the current fiscal-year earnings has moved up 3.6% since March-end, while the same for the next fiscal year has improved 3.3% in the past year.

Price and Consensus: VZ

We are also presenting three stocks with Zacks Rank #3 (Hold) that are well positioned to grow.

United States Cellular Corporation USM: Based in Chicago, IL, this wireless national telecom service provider has a trailing four-quarter average positive surprise of 13.4%. The Zacks Consensus Estimate for current fiscal-year earnings for this stock has moved up 15.8% since April-end, while that for the next fiscal has increased 26.5% during the same time period.

Price and Consensus: USM

GCI Liberty, Inc. GLIBA: Founded in 1979 and headquartered in Englewood, CO, this wireless national telecom service provider has gained a solid 52.3% in the past year. The Zacks Consensus Estimate for current fiscal-year earnings for this stock has moved up an astronomical 2,304.3% in the past year.

Price and Consensus: GLIBA

CenturyLink, Inc. (CTL): Based in Monroe, LA, this wireless national telecom service provider has a trailing four-quarter average positive surprise of 8.8%. The Zacks Consensus Estimate for the current and next fiscal-year earnings has moved up 10.9% and 8.3%, respectively, in the past year.

Price and Consensus: CTL

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