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Near-Term Tailwinds Buoy Wireless Equipment Industry Outlook

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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, satellite telecommunications, wireless networking and signal processing equipment and end-to-end enterprise mobility solutions. In addition, the firms provide a broad range of routing, switching and security products along with video surveillance and machine-to-machine communication components that secure VPN appliances, enable intrusion detection and thwart data theft for seamless transfer.

The industry participants help users shift their telecom networks to the latest 5G standards, including new use cases like IoT, public safety and fixed wireless access. From 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 the 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:

•    The coronavirus pandemic has forced the larger American population to shift almost everything — elementary schools, colleges, workplaces, shopping, dining, entertainment and even funeral — to the online domain to reduce exposure to this deadly disease. As people are forced to seek refuge in the safety of their homes, digital sustainability has become the norm of the day. With the exponential growth of mobile broadband, user demand for coverage speed and quality has increased. This has resulted in huge demand 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 home data traffic. Further, to maintain superior performance as traffic increases, there is 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, increasing demand for reliable access and fast-data services, thereby broadening the customer base and 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. Moreover, 5G is likely to augment the scalability, security and universal mobility of the telecommunications industry, which is expected to drive 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 through steady infrastructure investments. Although these investments will eventually help minimize service delivery costs to support broadband competition and wireless densification, short-term profitability has largely been compromised. Margins are likely to be affected by high cost levels associated with the first generation 5G products, profitability challenges in China and pricing pressure in early 5G deals.

•    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 overhaul 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 communication operations. However, paucity of demand due to geopolitical uncertainties and a challenging macroeconomic environment has dented the margins of most industry participants. Intense price wars due to rising costs of raw materials and stiff competition have added to the woes. High technological obsolescence of most products has also escalated operating costs with continuous investments in R&D.

Overall, despite certain macroeconomic challenges, the industry appears poised to benefit in the near term, providing the vital lifeline to millions in order to stay connected in the digital world as the virus outbreak redefines the broader industry metrics.

Zacks Industry Rank Indicates Bullish Prospects

The Zacks Wireless Equipment industry is housed within the broader Zacks Computer and Technology sector. It carries a Zacks Industry Rank #75, which places it among the top 30% 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.

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, 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 increased 1.1% over this period compared with the S&P 500 and the sector’s rally of 11.1% and 27.3%, 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 19.33X compared with the S&P 500’s 11.27X. It is also above the sector’s trailing-12-month EV/EBITDA ratio of 11.96X.

Over the past five years, the industry has traded as high as 25.88X, as low as 9.84X and at the median of 16.36X, as the chart below shows.

Trailing 12-Month enterprise value-to-EBITDA (EV/EBITDA) Ratio (Chart 2)

Bottom Line

The industry is likely to benefit from increased 5G deployment and massive proliferation of data traffic in the short run. However, large-scale investments to support the transition to 5G, high R&D costs and escalated raw-material costs amid the coronavirus-induced turmoil remain some of the deterrents.

Five stocks in this space currently have a Zacks Rank #2 (Buy), out of which we are presenting four stocks that are well positioned to grow. None of the stocks in the space sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

InterDigital, Inc. (IDCC - Free Report) : Headquartered in Wilmington, DE, this wireless equipment manufacturer has long-term earnings growth expectations of 15%. The Zacks Consensus Estimate for current-year earnings has moved up 40.8% since January-end this year, while that for the next year is up 65.2% since September 2019.

Price and Consensus: IDCC

Ericsson (ERIC - Free Report) : Founded in 1876 and headquartered in Stockholm, Sweden, this wireless equipment manufacturer has gained 25.4% in the past two years. The Zacks Consensus Estimate for current-year earnings has remained steady since September-end 2019, while that for next-year earnings has increased 3.33% over the past 90 days.

Price and Consensus: ERIC

PC-Tel, Inc. (PCTI - Free Report) : Founded in 1994 and headquartered in Bloomingdale, IL, this wireless equipment manufacturer has gained 28.5% in the past year. The Zacks Consensus Estimate for current-year earnings has moved up 84.2% in the past year.

Price and Consensus: PCTI

Juniper Networks Inc.: Based in Sunnyvale, CA, this wireless equipment manufacturer has gained 62.1% in the past year. The Zacks Consensus Estimate for current-year and next-year earnings has remained relatively stable over the past 30 days.

Price and Consensus: JNPR

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