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Analyst Blog

Last week wasn’t a favorable one for the telecom sector. Most of the major telecom stocks lost value mirroring the broader market (the S&P 500) movement attributable to renewed concerns over Brexit. Nevertheless, this did not keep the telecom sector from witnessing its usual slew of activities.

U.S. telecom regulator Federal Communications Commission (FCC) has postponed the final voting on the revised rules for “Unlock the Box” NPRM (Notice of Proposed Rulemaking) proposed by its Chairman, Tom Wheeler. In Feb 2016, the FCC voted 3-2 to advance the “Unlock the Box” NPRM for news rules concerning the set top box. The final voting was scheduled to take place on Sep. 29, 2016. Notably, major U.S. pay-TV operators have been vehemently opposing the NPRM.

Leading wireless chipset manufacturer Qualcomm Inc. (QCOM - Free Report) is gearing up for another acquisition and is reportedly in talks to buy the Netherlands-based semi-conductor company, NXP Semiconductors NV (NXPI - Free Report) . According to a recent Wall Street Journal report, the transaction is expected to be valued at around $30 billion or more and should be completed within the next two to three months.

Moreover, Qualcomm has teamed up with SK Telecom Co. Ltd. (SKM - Free Report) to evaluate the over-the-air technology of eLAA (Enhanced Licensed Assisted Access) and LAA (Licensed Assisted Access) that utilizes both licensed and unlicensed spectrum.

Meanwhile, U.S. telecom behemoth AT&T Inc. (T - Free Report) has reached an agreement with Communication Workers of America (CWA) covering the former’s DIRECTV employees in its Midwest, Southeast and Southwest regions. The agreement will deal with multiple issues like health care, pension and wages and collectively cover about 2050 employees of the company. Notably, AT&T had taken over DIRECTV in 2015.

In a separate development, AT&T has decided to rename its Network Functions on Demand platform as FlexWare. The new brand will provide a small device option, enhanced feature functionality for security and expanded global availability. Moreover, the company recently declared a multi-year deal with Taylor Swift for DirecTV's Super Saturday Night event and a carriage deal with Viacom Inc. (VIAB - Free Report) for its upcoming DirecTV Now platform.

Other developments worth mentioning include Level 3 Communications Inc.’s (LVLT - Free Report) recent Issuer Default Rating (IDR) upgrade to 'BB' from 'BB-' by credit rating agency Fitch Ratings. The rating agency has cited ongoing revenue growth of the company’s enterprise division as the main reason for the upgrade.

Leading cable MSO (multi service operator) Comcast Corp. (CMCSA - Free Report) has entered into a share warrant deal with Harmonic Inc. (HLIT - Free Report) . The warrant will allow Comcast to purchase up to a 10% stake in Harmonic at a fixed rate of $4.76 per share, contingent upon the performance of certain operational metrics like product milestones and sales target. Comcast currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Outside the U.S., Spanish telecom behemoth Telefonica SA (TEF - Free Report) was forced to abandon the initial public offering (IPO) of its infrastructure division Telxius due to weak market demand. The company may now be looking forward to an IPO of its U.K. wireless unit, O2 UK. The Telxius IPO failed to generate interest among investors due to its high valuation. Earlier this year, the European Union telecom regulator blocked the proposed sale of its O2 unit in the U.K. to 3UK of Hutchison Whampoa.

Read the last Telecom Stock Roundup for Sep 29, 2016.

Recap of the Week’s Most Important Stories

1.    Per the FCC, the set-top box market, dominated by pay-TV operators, is currently valued at about $20 billion annually. Meanwhile, lack of competition has resulted in higher rental fees for consumers. At present, an average consumer spends around $231 per annum to lease set-top boxes. According to a recent study by the FCC, the cost of cable set-top boxes has risen 185% while the price of computers, televisions and mobile phones has dropped 90% since 1994. (read more: FCC Defers Voting on Set Top Box Rules for Pay-TV Industry.)

2.    The proposed deal with NXP Semiconductors will place Qualcomm in the second position after Intel Corp. (INTC - Free Report) in terms of sales. The deal will also help Qualcomm fortify its hold in the Internet of Things (IoT) industry. It should also help Qualcomm transform its business model and shift from the low-margin, low-growth smartphone market to high-margin, high-growth, automotive market with secure devices, connectivity and payment procedures. (read more: Is Qualcomm Eyeing NXP Semiconductors Buyout?)

3.   AT&T has been pursuing negotiations regarding new contracts covering over 16,000 wireline employees in three of its operating states. However, the company is confident about striking a fair deal with the association soon. Also, in June this year, around 40,000 AT&T wireless workers, represented by the CWA, rejected a contract proposed by AT&T related to several benefits. (read more: AT&T Inks Contract with Communication Workers of America.)

4.    Level 3 Communications is gradually converting itself from a retail customer centric service provider to a predominantly enterprise-focused entity. Management has taken three strategic decisions in this regard. These are, increasing enterprise customer sales, deployment of a sizeable metro fiber network and developing a strong IP-based product portfolio. (read more: A Boon for Level 3 Communications - Fitch Raises Rating.)

5.    Recently, a Reuters report stated that Telefonica is moving ahead with a proposed IPO of its UK wireless division in Dec 2016, which may be delayed if the underlying macroeconomic conditions remain volatile. Such conditions could hurt valuations, and getting the proper assessment for its O2 unit is of utmost importance for Telefonica, as it looks to cut a massive debt from its balance sheet. (read more: Telefonica May Look at O2 UK for IPO after Telxuis Setback.)

Price Performance

The following table shows the price movement of the major telecom players over the past week and the last six months.

Company

Last Week

Last 6 Months

VZ

-3.19%

-6.07%

T

-4.19%

1.35%

S

-1.91%

85.52%

TMUS

-1.16%

17.83%

VOD

-1.79%

-7.15%

CHL

1.84%

14.50%

AMX

-0.34%

-23.52%

CMCSA

-0.50%

5.79%

DISH

2.67%

25.23%

Over the last five trading sessions, share price movement of most of the major telecom stocks was negative. AT&T (4.19%) and Verizon (3.19%) lost significant value in the last five trading sessions. On the contrary, over the last six months, the price performance of most telecom stocks was predominantly positive. Among the stocks that gained considerably were Sprint (85.52%), DISH (25.23%), T-Mobile US (17.83%) and China Mobile (14.50%). However, America Movil lost 23.52% over the same time frame.

What’s Next in the Telecom Sector?

We do not foresee any significant changes in the telecom industry or overall global economic factors that can affect the industry in the coming week. Therefore, we expect stocks to trade in line with the broader market movement.

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