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Communication Infrastructure Industry Outlook Appears Bullish

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The Zacks Communication - Infrastructure industry comprises companies that provide various infrastructure solutions for the core, access and edge layers of communication networks. These firms support mission-critical, high-bandwidth applications like cloud-based computing, video, mobile and machine-to-machine connectivity. Leveraging proprietary modeling and simulation techniques to optimize networks, the firms offer high-speed network access solutions for use across Internet protocol, asynchronous transfer mode and time division multiplexed architectures in both wireline and wireless network applications to leading global telecom operators, multi-system operators and enterprise customers. Their product portfolio encompasses optical fiber and twisted pair structured cable solutions, infrastructure management hardware and software, network racks and cabinets, and fiber-to-home equipment like hardened connector systems, couplers and splitters, and hardened optical terminating enclosures.

In addition, some firms provide materials for cellular base station sites and connectivity; indoor, small cell and distributed antenna wireless systems; and wireless network backhaul planning and optimization products and services to improve cellular coverage and capacity in high-traffic areas and places difficult for networks to penetrate. Certain firms within the industry provide data center infrastructure solutions that include colocation space and power, and interconnection services to various enterprise, cloud, carrier and content customers.

Here are the three major themes in the industry:

•    With exponential growth in video and other bandwidth-intensive applications owing to the wide proliferation of smartphones and increased deployment of the superfast 5G technology, the industry participants are making considerable investments in LTE, broadband and fiber in order to provide additional capacity and ramp up the Internet and wireless networks. As a result, these companies are rapidly transforming from legacy copper-based telecommunications firms to technology powerhouses with capabilities to meet the growing demand for flexible data, video, voice and IP solutions. At the same time, the industry participants are focusing on leveraging the wireline momentum, expanding media coverage, improving customer service and achieving a competitive cost structure to generate higher average revenue per user, while attracting new customers.

•    The success of 5G hinges on substantial investments to upgrade infrastructure in the core fiber backhaul network to support anticipated growth in data services. With operators moving toward converged or multi-use network structures, combining voice, video and data communications into a single network, the industry is increasingly developing solutions to support wireline and wireless network convergence. Although these investments will eventually help minimize service delivery costs to adequately support broadband competition, rural coverage and wireless densification, short-term profitability has largely been compromised. The industry's near-term prospects also remain vulnerable to a number of factors like risks of disruption from extreme weather and the growing menace of cyberattacks. Efforts to build resilient infrastructure facilities to withstand natural catastrophes have further increased operating costs. However, with the coronavirus pandemic creating worldwide devastation, countless people have largely been confined to the safety of their homes to prevent exposure to the deadly virus. These have increased the dependency on wireless communication systems, with digital sustainability becoming the norm of the day.

•    More and more companies are offering the work-from-home option to employees to ensure their safety and wellbeing. Several firms are providing a secure and connected workplace setup through quick onboarding and enablement services to support the seamless continuity of businesses and enable employees to fulfill their professional obligations. With more cities going under lockdowns and the administration asking people to opt for home quarantine, the remotely working trend is likely to be in vogue till the pandemic subsides. This, in turn, is likely to create new revenue-generating opportunities for the industry, as humans become solely dependent on the digital platform to stay connected not only for their professional lives but also for online education, shopping, dining and entertainment.

Overall, despite the worldwide mayhem led by the coronavirus pandemic, the industry appears to be poised for long-term growth with wider coverage and greater dependency.

Zacks Industry Rank Indicates Bright Prospects

The Zacks Communication - Infrastructure industry is housed within the broader Zacks Computer and Technology sector. It carries a Zacks Industry Rank #50, which places it among the top 20% 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 bullish 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 20% of the Zacks-ranked industries is a result of a positive earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are regaining faith in this group’s earnings growth potential. In the past year, the industry’s earnings estimates for the next fiscal year have improved 271.2%.

Before we present a few communication infrastructure 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 Underperforms Sector and S&P 500

The Zacks Communication - Infrastructure industry has lagged the broader Zacks Computer and Technology Sector as well as the S&P 500 composite over the past year.

The industry has declined 41% over this period compared with the S&P 500 and the sector’s fall of 4.6% and 1%, respectively.

One Year Price Performance

Industry’s Current Valuation

On the basis of the 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 7.76X compared to the S&P 500’s 10.23X. It is also trading below the sector’s trailing 12-month EV/EBITDA of 10.48X.

Over the past five years, the industry has traded as high as 12.93X and as low as 6.70X and at the median of 8.86X, as the chart below shows.

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

Bottom Line

The industry appears firmly placed to benefit from the ramping up of the Internet and wireless networks, driven by considerable investments in LTE, broadband and fiber optic network coverage.

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.

Anterix Inc. (ATEX - Free Report) : Headquartered in Woodland Park, NJ, this communications infrastructure provider delivered a positive earnings surprise of 6.8%, on average, in the trailing four quarters. The Zacks Consensus Estimate for current and next fiscal-year earnings has moved up 27.1% and 32.6%, respectively, in the past year.

Price and Consensus: ATEX

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

Calix, Inc. (CALX - Free Report) : Headquartered in San Jose, CA, this communications infrastructure provider has gained 11.4% in the past year and delivered a positive earnings surprise of 24%, on average, in the trailing four quarters. The Zacks Consensus Estimate for next fiscal-year earnings has moved up 12.5% since October 2019.

Price and Consensus: CALX

Bandwidth Inc. (BAND - Free Report) : Headquartered in Raleigh, NC, this communications infrastructure provider has gained 8.9% in the past year. The stock has a long-term earnings growth expectation of 13.4% and delivered average positive earnings surprise of 67.2%, on average, in the trailing four quarters. The Zacks Consensus Estimate for current and next fiscal-year earnings has moved up 34.8% and 97.6%, respectively, over the past year.

Price and Consensus: BAND

ADTRAN, Inc. (ADTN - Free Report) : Based in Huntsville, AL, this communications infrastructure provider has delivered a positive earnings surprise of 69.9%, on average, in the trailing four quarters. The Zacks Consensus Estimate for next fiscal-year earnings has moved up 86.7% since November 2019.

Price and Consensus: ADTN

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