In the early hours of Dec 2, 2017, Senate Republicans passed a $1.5 trillion tax overhaul package proposed by President Donald Trump in a 51-49 voting. The White House hopes that the bill becomes law by the end of the year. While the tax reform bill has resulted in a series of controversies among several economists and financial experts, we believe the U.S. telecommunications industry is going to be a major beneficiary.
Trump’s proposed policy changes have made the overall economic outlook fairly bullish. The two pro-growth agendas of Trump, namely, a significant cut in corporate taxes and deregulation are major catalysts to the U.S. economy.
The proposal to reduce corporate taxes from the current 35% to 20% is likely to bring corporate tax rate at its historic low in 78 years. Large telecom operators book much of their revenues in the homeland. Therefore, a significant reduction in corporate tax rate faced by telecom carriers would be immediately accretive to cash flow. Moreover, the tax proposal offers to provide incentives to companies to repatriate accumulated profits from overseas with an even lower tax rate.
Capital-intensive Nature of Telecom Industry
The telecom industry is highly capital-intensive in nature. Therefore, the immediate expensing of investment in all tangible, intangible and real property (other than land) would significantly benefit telecom carriers. This would encourage telecom operators to increase investment for capital expenditure.
Major proposals like a pledge to spend $1 trillion in infrastructure projects over a period of 10 years coupled with the above-mentioned policy changes are likely to spur higher consumer spending. This may create about 25 million new jobs over a decade, which in turn will fuel long-term economic growth.
Effect on Upcoming 5G Wireless Network
Fifth-generation (5G) superfast wireless networks will provide the primary impetus to the telecom industry. In September 2017, Moody's Investors Service stated in a report that the evolution towards 5G wireless networks will result in higher capital spending for U.S. wireless carriers. Trump’s tax proposal will result in a huge windfall for telecom operators. The carriers can utilize this money for 5G network R&D and its deployment.
In this context, Internet-of-Things (IoT) holds the potential of becoming the numero uno factor in driving growth in the space. Upcoming 5G mobile networks will be of utmost importance in the management of exponential growth in IoT. Lower taxes would also enable telecom operators to increase capex budgets to build and upgrade their networks in order to make it IoT ready.
According to a report by research firm International Data Corporation (IDC), worldwide spending on IoT is expected to grow at a 17% compound annual growth rate (CAGR) to nearly $1.3 trillion in 2019 from $698.6 billion in 2015.
Easy Regulatory Policies
President Trump has stated that he wants to do away with nearly 75% of all governmental regulations during this term as the President. We believe that the telecom industry will be one of the major beneficiaries of this policy change. A new Federal Communications Commission (FCC), headed by Ajit Pai, exercising lesser restrictions, certainly augurs well for the ISP (Internet Service Providers) industry.
On Apr 3, 2017, Trump signed a repeal of the Obama-era broadband privacy rules. This has given a major boost to the ISPs. The digital advertisement market is growing exponentially and ISPs have been increasingly investing resources to cash in on bountiful opportunities. However, the FCC’s previous directive stipulated that the ISP should notify customers before sharing any user data for advertising. This would have marred ISP prospects.
More importantly, on Nov 21, Pai revealed a draft plan for a complete roll back of Net Neutrality. The FCC is set to vote on the proposed changes during its upcoming Dec. 14 monthly meeting. There is little doubt that if the new FCC scraps Net Neutrality laws, the ISP industry will be the major beneficiary. The current FCC's less restrictive regulatory attitude may also pave the way for new mergers and acquisition deals between ISPs and online digital media companies.
Stocks in Focus
We believe that the major beneficiaries of the U.S. Tax Reforms bill will be the four large national telecom operators. Significant tax relief together with the strong underlying policy of ensuring that Americans have access to high-speed mobile broadband in rural and urban areas alike, should help large telecom operators going forward.
Notably, all four national telecom operators currently carry a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Verizon Communications Inc. (VZ - Free Report) : Headquartered in New York, the company is one of the largest communication technology companies offering all kinds of wireless and wireline services. For 2018, the Zacks Consensus Estimate for earnings per share (EPS) is pegged at $3.88, reflecting year-over-year growth of 2.75%. The consensus estimate for revenues is $127.31 billion, up 1.64% year over year.
AT&T Inc. (T - Free Report) : Headquartered in Dallas, TX, the company is also one of the largest communication technology companies offering all kinds of wireless and wireline services. For 2018, the Zacks Consensus Estimate for EPS is pegged at $2.96, reflecting year-over-year growth of 1.32%. The consensus estimate for revenues is $160.59 billion, up 0.32% year over year.
T-Mobile US Inc. (TMUS - Free Report) : Headquartered in Bellevue, WA, the company is a leading wireless service provider in the United States. For 2018, the Zacks Consensus Estimate for EPS is pegged at $2.69, reflecting year-over-year growth of 11.47%. The consensus estimate for revenues is $43.09 billion, up 5.88% year over year.
Sprint Corp. (S - Free Report) : Headquartered in Overland Park, KS, the company is a leading wireless and wireline service provider in the United States. For 2018, the Zacks Consensus Estimate for loss per share is pegged at $0.02, reflecting year-over-year improvement of 17.90%. The consensus estimate for revenues is $32.98 billion, up 1.25% year over year.
Telecommunications is one of the few industries to have seen rapid technological improvement even during the recession. Owing to the significance of this service as an infrastructure product, we expect the overall economic dynamics to shift in favor of the industry. At this stage, we believe that these four stocks are poised to capitalize on the growing opportunities of major tax relief.
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