The U.S. telecommunications industry had a disappointing 2017. Cut-throat pricing competition resulting in lower ARPU (average revenue per user) and margins, massive investment for upcoming 5G wireless network and fiber optic buildout resulting in low free cash flow and intense competitive pressure shifted investor’s focus toward other growth-oriented industries in an overall bull market in 2017.
However, the situation has been showing signs of easing from fourth-quarter 2017 as most of the major telecommunications stocks have done well since then. The momentum is likely to continue in 2018 albeit at a slow pace. Several positives have appeared for this industry in the last quarter of 2017.
President Donald Trump’s proposed policy changes have made the overall economic outlook fairly bullish. The two pro-growth agendas of Trump, namely, significant cut in corporate tax and deregulation are major catalysts to the U.S. economy. Trump has stated that he wants to do away with nearly 75% of all governmental regulations during his term as the President. We believe that the telecom industry will be one of the major beneficiaries of this policy change.
On Dec 14, 2017, in a landmark decision, the U.S. telecom regulator Federal Communications Commission (FCC) repealed the Net Neutrality laws that it had imposed under the Obama regime.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 major beneficiary after FCC dismantling Net Neutrality. The current FCC's less-restrictive regulatory attitude may also pave the way for new merger and acquisition deals between ISPs and online digital media companies.
The proposal to reduce corporate tax rate from 35% to 20% faced by telecom carriers would be immediately accretive to cash flow. 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.
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 such as 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.
Performance So Far
Per the latest Zacks Earnings Trend report, only 53 S&P 500 members have reported fourth-quarter earnings results as of Jan 19. Total earnings for these companies are up 11.7% from the same period last year on 7.5% higher revenues, with 81.1% beating EPS estimates and 75.5% beating revenue estimates. The proportion of companies beating both EPS and revenue estimates is 62.3%.
The Q4 earnings season is on track and is expected to be very good. Four important points can be inferred from the results thus far. First, the +11.7% earnings growth for the 53 index members compares is about the same as the +11.9% growth in Q3 and modestly below the 4-quarter average of +12.8%. Second, the +7.5% revenue growth for these 53 index members represents a notable acceleration in growth momentum. Third, the 81.1% proportion of the companies beating EPS estimates in Q4 is the highest we have seen from these 53 index members in other recent periods. Fourth, the 75.5% of the companies beating revenues is similarly the highest we have seen from this group of companies in recent periods. (Read More: Q4 Earnings Season: Strong Growth, But Weak Quality)
In the telecom space, so far, national wireless behemoth Verizon Communications has reported Q4 results. The result was a mixed bag. While the top line beat the Zacks Consensus Estimate, the bottom line lagged the same. Nevertheless, the carrier has witnessed significant net addition of postpaid wireless subscribers with reduced churn rate.
How to Make a Selection?
With the existence of a number of industry players, finding the right stocks that have the potential to beat earnings estimates could appear a difficult task, however, our proprietary methodology makes it fairly simple for you. One way to narrow down the list of choices during the earnings season is to look 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 for identifying stocks that have high chances of surprising with 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 chances of a positive earnings surprise are as high as 70%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.
Relying on the above methodology, we have zeroed in on five telecom stocks that are likely to beat the Zacks Consensus Estimate this earnings season.
Harris Corp. has an Earnings ESP of +0.11% and a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here. The company is scheduled to report results on Jan 30. It has an average positive earnings surprise of 2.80% in the last four quarters and a long-term (three-five years) earnings growth rate of 6.00%.
Vocera Communications Inc. (VCRA - Free Report) has an Earnings ESP of +15.32% and a Zacks Rank #3. The company is scheduled to report results on Feb 8. It has an average positive earnings surprise of a whopping 44.86% in the last four quarters and a substantial long-term (three-five years) earnings growth rate of 17.75%.
Extreme Networks Inc. (EXTR - Free Report) has an Earnings ESP of +7.69% and a Zacks Rank #3. The company is scheduled to report results on Feb 7. It has an average positive earnings surprise of a whopping 27.54% in the last four quarters and a substantial long-term (three-five years) earnings growth rate of 17.00%.
Plantronics Inc. (PLT - Free Report) has an Earnings ESP of +1.69% and a Zacks Rank #3. The company is scheduled to report results on Jan 30. It has an average positive earnings surprise of 5.85% in the last four quarters and a substantial long-term (three-five years) earnings growth rate of 15.00%.
Citrix Systems Inc. (CTXS - Free Report) has an Earnings ESP of +0.52% and a Zacks Rank #3. The company is scheduled to report results on Jan 31. It has an average positive earnings surprise of 7.97% in the last four quarters and a long-term (three-five years) earnings growth rate of 5.33%.
While the U.S. telecom industry offers several growth catalysts in the long term, buoyed by favourable economic and industry-related factors, we believe investor’s should also take care of any near-term fluctuations due to growing competition and increasing saturation of the U.S. wireless market. However, a number of companies in the space have fared well. Picking some outperformers from the space, backed by a solid Zacks Rank and a positive Earnings ESP, could lead investors to gain this earnings season.
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