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U.S. Telecom Industry: Momentum to Continue in 2017

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The surprising victory of Republican Donald Trump in the presidential election is starting to impact telecom policy parameters. Trump will take charge of White House on Jan 20, 2017 and will select a new Chairperson of the U.S. telecom regulatory body, the Federal Communications Commission (FCC). The Trump regime is likely to bring some relief as well as concerns for the telecom industry.

Nevertheless, the U.S. telecommunications industry is likely to witness reasonable growth through 2017. This industry has lately emerged as an intensely contested space where success depends largely on technical superiority, the quality of services and scalability. Cut-throat pricing competition may put pressure on margins. Uninterrupted advancement in telecom technologies has helped telecom operators and equipment manufacturers adopt newer business models in order to boost revenues.

Wireless network strength holds the key to overall growth of this space. As wireless networks run on radio frequency, spectrums (airwaves) have logically become the most sought-after asset in the industry. Spectrum auctions conducted by the FCC from time to time will significantly boost network capacity.

Key Attributes for 2017

(1) The telecommunications industry is essentially characterized by high barriers to entry. The deployment of network infrastructure requires significant capital expenditure, which very few entities can afford. Furthermore, it is not easy for a new telecom carrier to establish itself in the market as it requires government approval to transmit voice, data and video. Such barriers protect the profits of incumbents.

(2) A major characteristic of the telecommunications industry is that it is immune to international geo-political disturbances, even when these lead to economic fluctuations. This is because the need to remain connected springs from our earliest instincts to communicate with fellow human beings. Volatility in the global economy due to political and economic disturbance in the Eurozone, Asia-Pacific or the Middle-East has had little impact on the sector.

(3) Wireless network strength is the key to future growth of the overall telecom industry. As wireless networks run on radio frequency, spectrums (airwaves) are naturally the most sought after assets in the industry. Spectrum auctions conducted by the FCC from time to time will significantly boost network capacity.

(4) Telecom companies offer one of the highest dividend yields in the U.S. economy. Unlike other industries, U.S. telecom operators generate their revenues predominantly in the country. This makes these stocks less susceptible to volatility in the foreign exchange rate as well as macro-economic fluctuations plaguing the rest of the world. We believe the strong dividend yield momentum will continue as the U.S. economy slowly returns to stability.

(5) Mergers and acquisitions (M&A) are not uncommon in the U.S. telecom industry. Telecom and pay-TV operators often join forces to provide better and attractive bundled products to their customers. In order to stay abreast of competition, existing players need to be constantly on their toes to introduce innovative products or merge with other companies. In the near future, the U.S. telecom industry is slated to witness further mergers and acquisitions along with product diversifications.

Major Upcoming Developments

Telecommunications is one of the few industries to have undergone rapid technological improvement even during the Great Recession. An era of digitization and technology has essentially been built on the basic requirement to remain connected. It is in this context that telecommunications comes to the fore as a necessary utility. Growing demand for technologically superior products is the silver lining in the telecom industry in an otherwise tough environment.

5G Wireless Technology

Several industry researchers hold that fifth-generation (5G) network will provide a download speed of 1 Gbps (gigabit per second), which is 200 times the throughput of the currently available standard 4G LTE network. Latency period of data delivery will be in single milliseconds. Further, 5G technology is designed to be more power-efficient than any other standard wireless network available at the moment. Naturally, 5G-enabled mobile devices are likely to last much longer than their 3G or 4G counterparts.

In July 2016, in a landmark voting, the FCC unanimously decided to make available high-frequency radio spectrums (above 24 GHz) for the use of the upcoming 5G wireless network. With this, the U.S. becomes the first country in the world to identify and open up a significant amount of spectrum suitable for the ultra-fast 5G mobile standard. At present, all four major national wireless operators, namely, Verizon Communications Inc. (VZ - Free Report) , AT&T Inc. (T - Free Report) , Sprint Corp. (S - Free Report) and T-Mobile US Inc. (TMUS - Free Report) are going through trial runs for 5G wireless standards. Notably, Verizon has announced that an initial 5G network will be deployed in 2017.

All four stocks mentioned above currently carry a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Internet of Things (IoT): The Next Growth Driver

IoT, which enables any physical electronic device with a valid IP-address to transfer data seamlessly over a wireless network, is quickly gaining significant market traction and bringing about fundamental changes in business models. Next-generation superfast wireless networks (4G LTE, LTE-A, upcoming 5G) will provide the primary impetus to the telecom industry. In this context, IoT holds potential to be the main factor in driving future growth in the space.

IoT is a network of physical objects embedded with electronics, software, sensors and connectivity that facilitates it to achieve greater value and service by exchanging data with other connected devices. Superfast 5G mobile networks will be of utmost necessity in managing the exponential growth of IoT.

Online Digital Advertisement: Strong Potential

Advertisement on the mobile video platform is gradually leaning away from simple selling of banner ads on the mobile web to automated or programmatic ad selling. Pay- TV operators are steadily adopting the data-driven advertising technique that is already popular in the web-based advertisement arena. To derive maximum synergy from the combined video content and video distribution platform, these companies are extensively penetrating into the advertising technology market.

Inclusions of dynamic ad-insertion, targeted audience advertising and data-driven TV advertisements are all steps toward the same objective. According to market research company eMarketer, the global mobile ad market value is expected to reach $ $133.7 billion by 2017.

Zacks Industry Rank

Within the Zacks Industry classification, Telecommunications is broadly grouped in the Computer and Technology sector (one of the 16 Zacks sectors) and is further sub-divided into 12 industries at the expanded level: Communications Infrastructure, Communications Components, Satellite Communications, Cable TV, Diversified Communications Services, Internet Services, Wireless Equipment Supplier, National Wireless Service Provider, Rural Wireline Operator, Non-U.S. Wireless Operator, National Wirleline Operator and Non-U.S. Wireline Operator. The level of sensitivity and exposure to different stages of the economic cycle vary for each industry.

We rank all the 260-plus industries in the 16 Zacks sectors based on the earnings outlook and fundamental strength of the constituent companies in each industry. To learn more visit: About Zacks Industry Rank. As a guideline, the outlook for industries with a Zacks Industry Rank of #88 and lower is 'Positive,' those between #89 and #176 is 'Neutral' while for those with #177 and higher is 'Negative.'

The Zacks Industry Rank for Communications Infrastructure is #75, Communications Components is #53, Internet Services is #85, Satellite Communications is #100, Cable TV Operators is #208, Diversified Communications Services is #203, Wireless Equipment Supplier is #45, National Wireless Operators is #67, National Wireline Operators is #100, Rural Wireline Operators is #100, Non-U.S. Wireless Operators is #225 and Non-U.S. Wireline Operators is #193. Looking at the Zacks Industry Rank of the 12 telecommunications industries, we believe that the near-term outlook for the group is tending more toward 'Positive.'

Earnings Trend in the Sector

The broader Technology sector, of which the telecommunications industry is part, delivers a strong show with respect to earnings. So far, 98.4% of the sector participants have reported third-quarter 2016 financial results, which have been impressive in terms of beat ratios (percentage of companies coming up with positive surprises). Further, earnings growth was positive while revenue growth was negative.

Both the earnings beat ratio and the revenue beat ratio were strong at 80% and 75%, respectively, in the third quarter. Moreover, total earnings for the reported companies have shown an impressive 4.0% year-over-year increase on a 1.3% decline in revenues. This compares favorably with an earnings decline of 0.2% in the second quarter of 2016. Revenues witnessed substantially more decline of 2.6% in the second quarter of 2016.

Meanwhile, the consensus earnings expectation for the next two quarters depicts a mediocre trend. While earnings growth is anticipated to grow 3.3% in the fourth quarter of 2016, it is likely to grow 10.5% in the first quarter of 2017. Similarly, revenue is expected to grow 4.2% year-over-year in the fourth quarter of 2016 and another 6.1% in the first quarter of 2017.

For a detailed look at the earnings outlook for this sector and others, please read our weekly Earnings Trends reports.


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