The U.S. telecommunications industry is currently balanced between almost equal proportions of positive and negative influences. President Trump elected existing Republican commissioner Ajit Pai as the new Chairman of the U.S. telecom regulatory body – Federal Communications Commission (FCC). The new FCC has given enough indications that it will be less strict compared with the previous body under the Obama administration. It is also likely to roll back several stringent regulations of the previous regime. We believe that the less restrictive nature of the FCC will aid mergers and acquisitions, thus likely spurring growth in 2017. Moreover, the expected corporate tax reform will also benefit telecom operators.

However, several near-term headwinds continue to persist in the telecom industry. Growing price competition for wireless services is among the chief ones. These are likely to reduce carriers' revenue growth in 2017. In addition, leading cable MSOs (multi service operators) have decided to enter the wireless field in 2017. This is likely to intensify competition in an already saturated market. Further, capital spending by the U.S. telecom carriers may be muted in 2017. The 4G LTE wireless penetration is currently 83% in North America. This can primarily be attributed to most carriers’ intention to upgrade to 5G wireless network standard which requires massive investment. However, a full phased 5G network deployment is unlikely before 2020.

Per the latest Earnings Trends report, 95 S&P 500 members (accounting for 24.9% of the index’s total membership) have reported their first-quarter earnings results as of Friday, Apr 21. Total earnings for these companies are up 14.3% on 4.6% higher revenues, with 72.6% beating EPS estimates and 62.1% beating revenue estimates. The proportion of companies beating both EPS and revenue estimates is 51.6%.

For Q1 as a whole, we anticipate the pace of growth to improve steadily. In fact, our latest scorecard projects that earnings for the S&P 500 companies are now on track to grow 9.1% from the year-ago period on 6.0% higher revenues. This is comparable to earnings growth of 7.4% in Q4, on 4.8% higher revenues.

Factors at Play

Telecommunications is a necessary utility. The need for telecom in both rural and urban areas as well as its role in the infrastructural development of an economy is of vital importance.

5G Wireless Technology

According to a study commissioned by Qualcomm, fifth-generation (5G) wireless technology could result in global economic growth by $3 trillion cumulatively from 2020 to 2035. Several industry researchers hold that 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 high-frequency radio spectrums (above 24 GHz) available for use by 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, AT&T, Sprint and T-Mobile US are conducting trial runs for 5G wireless standards.

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 numero uno 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.

How to Make the Right Pick?

Given the large number of industry participants, selecting stocks that have the potential to beat estimates appears to be a daunting task. Nonetheless, our proprietary methodology makes it fairly simple.

One way to narrow down the list of choices this earnings season is by looking at stocks that have the combination of a favorable Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) and a positive Earnings ESP.

Earnings ESP is our proprietary methodology to determine which stocks have the best chance to surprise in their next earnings announcement. It shows the percentage difference between the Most Accurate estimate and the Zacks Consensus Estimate. Our research shows that for stocks with this combination, the chance of a positive earnings surprise is as high as 70%. Earnings beat boosts investor’s confidence in the stock, which is reflected in its rapid price appreciation. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Our choices

With the aid of the above methodology, we have zeroed in on five telecom stocks that are likely to beat the Zacks Consensus Estimate in this earnings season.

TIM Participações S.A. has an Earnings ESP of +11.11% and carries a Zacks Rank #1. You can see  the complete list of today’s Zacks #1 Rank  stocks here.  The company is scheduled to report results on May, 10. The company has delivered positive earnings surprises in two of the last four quarters, with an average beat of around 4.70%.

Fairpoint Communications Inc. has an Earnings ESP of a whopping +8,800.00% and carries a Zacks Rank #2. It is slated to report results on May. 3.

Intelsat S.A. has an Earnings ESP of +23.08% and carries a Zacks Rank #2. The company is scheduled to report results on Apr. 27. The company has delivered positive earnings surprises in two of the last four quarters, with an average beat of around 167.34%.

The Earnings ESP for RigNet Inc. is a substantial +84.62% and the stock carries a Zacks Rank #3. The company will release its Q1 earnings results on May. 8.

The Earnings ESP for Sprint Corp. (S Quick QuoteS - Free Report) is a significant +50.00% and the stock carries a Zacks Rank #3. The company will release its Q4 of fiscal 2016 earnings results on May. 3.

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