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Why the Cuban Dream Maybe Over for US Telecom Operators

T S VZ TMUS

Trades from $3

President Obama’s decision to normalize U.S. diplomatic and economic relations with Cuba, which had been considerably strained since 1961, is again under threat.

Recently, President-elect Donald Trump threatened to terminate the Obama administration's efforts to normalize US-Cuba relations. According to CNN, Trump tweeted "If Cuba is unwilling to make a better deal for the Cuban people, the Cuban/American people and the U.S. as a whole, I will terminate the deal."

Notably, Cuba is currently going through a political transition as its long-time dictator and former President Fidel Castro passed away on Nov 25. His brother and present President Raul Castro is taking over complete control of Cuba. Likewise, the White House is witnessing a change of regime from Obama to Trump.

Under Obama’s administration, new Cuban policy regulations, approved by the Treasury and Commerce departments, aided the U.S. telecom industry to gain initial exemptions from the existing embargo to invest in Cuba.

The newly developed truce between the two countries enables the U.S. telecom operators to export telecom equipment and services to Cuba. Under these regulations, the U.S. telecom carriers were also permitted to establish the necessary infrastructure in Cuba to offer various telecom services including the Internet.

In Mar 2015, U.S.-based IDT Corp had formed a joint venture with Cuba's state-run Empresa de Telecomunicaciones de Cuba SA (ETECSA) to provide direct international long-distance service. In Sep 2015, Verizon Communications Inc. (VZ - Free Report) became the first U.S. telecom operator to offer roaming wireless services in Cuba.  

Meanwhile, in Nov 2015, Sprint Corp. (S - Free Report) signed the first direct roaming wireless service agreement with ETECSA. Earlier, in Apr 2015, Sprint’s prepaid service division – Boost Mobile – had launched an unlimited voice call and text message service plan between the U.S. and Cuba.

In May 2016, T-Mobile US Inc. (TMUS - Free Report) had also signed an interconnection and roaming wireless service agreement with ETECSA. Notably, T-Mobile US serves the maximum number of customers in the U.S. who are of Cuban descent. Furthermore, starting from Oct 18, U.S. telecom giant AT&T Inc. (T - Free Report) has been offering direct roaming mobile interconnection services to Cuba.

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

Price Performance of Four Major Wireless Operators

Year-to-date, the Zacks categorized U.S. wireless industry has registered an impressive growth of 17.02%. However, the stock prices of two relatively large telecom operators, namely, Verizon and AT&T have underperformed the industry mark. While AT&T has registered a growth of 14.73%, Verizon witnessed just 10.26% growth in the same time period.

On the other hand, two smaller players -- T-Mobile US and Sprint -- have outperformed the industry. Shares of T-Mobile US surged 41.59% while Sprint witnessed an astonishing 120.99% growth in the same time-frame.

Nevertheless, both T-Mobile US and Sprint are emphasizing on their core wireless network offering several price concessions to entice customers away from their large peers. In contrast, Verizon and AT&T are gradually diversifying their business model into Internet TV, digital mobile platform and highly lucrative mobile advertising segments. We believe this is the primary reason behind all four nation wireless operators currently carrying a Zacks Rank #3.

Our View

We believe that the U.S. telecom operators may not reap any near-term gain from Cuban investments as the country is less developed at present and reels under highly restrictive government regulations. However, in the long-term, Cuba may become a boon for telecom carriers who choose to operate in the country. An opportunity to sell products and services to 11 million untapped customers is a very lucrative and enticing one.

Further, with the weakening of communism and the willingness to enter the economic as well as political mainstream, Cuba is poised to become an attractive emerging market in the future. Additionally, Cuba’s geographical proximity to the U.S. is a major positive for these telecom operators from the cost of operations standpoint.

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