Last week was pretty eventful for the telecom industry. In a landmark decision, the U.S. telecom regulator Federal Communications Commission (FCC) repealed the Net Neutrality laws that it had imposed under the Obama regime. There is little doubt that the ISP industry will be the biggest beneficiary after FCC dismantling Net Neutrality.
Leading ISPs including AT&T Inc. (T - Free Report) , Verizon Communications Inc. (VZ - Free Report) , Comcast Corp. (CMCSA - Free Report) and Charter Communications Inc. (CHTR - Free Report) strongly criticized Net Neutrality rules. Nevertheless, Net Neutrality supporters are preparing for a legal battle. We expect this subject to remain a hot cake in the 2018 telecom space.
Meanwhile, the third largest wireless carrier T-Mobile US Inc. (TMUS - Free Report) is set to unveil its online TV steaming service in 2018 after its recent deal to acquire Denver–based video technology innovator Layer3 TV Inc. Denver-based Layer3 TV combines TV, streaming online video content and social media content under one platform. It can also transmit HD video at a bandwidth of less than 4 megabits per second. T-Mobile will leverage LTE network speeds and Layer3 TV’s technology to roll out streaming TV service.
AT&T and media giant Time Warner Inc. are finally heading for a battle in court against the U.S. Department of Justice (DOJ) in 2018 over their $85.4 billion big-ticket merger deal. On Nov 20, 2017, the U.S. Department of Justice (DOJ) filed a lawsuit against the telecom behemoth over its mega acquisition deal. AT&T will challenge the DOJ verdict in court. However, a court ruling is unlikely to come before May 2018. Notably, both the companies have resettled the closing date for the deal at Apr 20, 2018.
AT&T recently shared information on a tentative deal with the Communications Workers of America (CWA) in relation with AT&T Mobility Orange unit employees. Announced on Dec 13, the four-year contract covers more than 20,000 AT&T Mobility employees (in wireless retail, call center and tech segments) in 36 states and the District of Columbia. AT&T currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Moreover, the company has raised its quarterly dividend by 2% to 50 cents per share (annualized $2.00 per share). Sanctioned by the company’s board of directors, the dividend will be paid on Feb 1, 2017 to shareholders of record as of Jan 10. This marks the 34th annual dividend increase by the company.
Verizon recently completed the $225-million purchase of fiber-optic network assets from WideOpenWest, Inc. (WOW - Free Report) in the Chicago area. Per the terms of the deal, Verizon will pay WideOpenWest an additional $50 million to complete Chicago network build in second-half 2018. The amount will increase to $275 million at the time of completion.
Read the last Telecom Stock Roundup for Dec 14, 2017.
Recap of the Week’s Most Important Stories
1. The primary issue related to the Net Neutrality controversy is that can high-speed broadband (Internet) be treated as public utility like phone, electricity, gas, water etc. Telecom is a major infrastructure product. Can Internet be classified as an essential service for livelihood for which the bulk of the investment is coming from private sector? Net Neutrality laws reclassified Internet as a public utility under Title II of the 1934 Communications Act instead of section 706 of the 1996 Telecommunications Act. The reclassification is associated with strong control mechanism. (Read more: FCC Bids Adieu to Net Neutrality - Legal Battle Looms)
2. Internet-TV streaming service is gaining market traction gradually in the United States. Recently, the legacy pay-TV industry has been facing stiff competition from online video streaming service providers such as Netflix, Hulu.com, YouTube etc. because of their cheap source of TV programming. The low-cost over-the-top (OTT) video streaming service has resulted in massive cord cutting, which is currently threatening the pay-TV business model. (Read more: T-Mobile US to Launch OTT Service in 2018, Buy Layer3 TV)
3. AT&T’s growth in 2018 will largely depend on the court ruling on the Time Warner merger deal. If the court ruling goes against AT&T, three options will be available: either scrapping the deal, divesting its DIRECTV division, or acquiring Time Warner without the Turner Broadcasting assets including CNN. On the other hand, if the court ruling goes in AT&T’s favour, the merged entity will enjoy control over both high-quality content and distribution medium. (Read more: AT&T, Time Warner Fail to Settle Acquisition Talks with DOJ)
4. Accumulation of dark fiber will bolster Verizon’s cell network density, which will consequently boost mobile backhaul network. Dark fiber provides abundant bandwidth and is extremely importance for the smooth functioning of super-fast wireless networks like 4G and 5G. Dark fiber-based backhaul provides scalability and efficiency to bandwidth management. This will eventually help the company to significantly reduce backhaul costs. (Read more: Verizon Acquires WideOpenWest's Chicago Fiber Assets)
5. AT&T claims that the dividend hike was backed by the company’s strong cash flows and business outlook. In third-quarter 2017, AT&T generated $11,114 million of cash from operations compared with $10,995 million from the prior-year quarter. Free cash flow in the reported quarter was $5,863 million compared with $5,182 million in the year-ago quarter. Management expects free cash flow to be enough to pay debt and return cash to shareholders. (Read more: AT&T Rewards Shareholders With Dividend Hike Despite Woes)
The following table shows the price movement of the major telecom stocks in both the last week and last six months.
|Company||Last Week||Last 6 Months|
In the last five trading sessions, share price movement of most of the major telecom stocks was positive. Verizon, AT&T and Comcast gained significantly in the same time frame. On the other hand, price performances of most of the major telecom stocks were negative in the last six months. Sprint and DISH Network suffered major reverses in the stock price, while Verizon gained attractively in the same time period.
What’s Next in the Telecom Space?
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. Consequently, we expect stocks to trade in line with the broader market.
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