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3 Communication Stocks Poised to Benefit From Pent-Up Demand

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·10 min read
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  • GLW
  • ^GSPC
  • KN
  • VIAV

The Zacks Communication - Components industry appears poised to benefit from healthy growth dynamics, favorable industry drivers and solid demand trends as the economy gradually returns to normal after the pandemic-induced adversities. The 5G transition is also expected to be disruptive, creating new avenues for the industry.

Amid such tailwinds, Corning Incorporated (GLW), Viavi Solutions Inc. (VIAV) and Knowles Corporation (KN) are likely to gain in the long run as pent-up demand for scalable infrastructure rises for seamless connectivity amid wide proliferation of IoT driven by faster pace of 5G deployment.

Industry Description

The Zacks Communication - Components industry primarily comprises companies that provide diverse telecom products and services for the development of scalable network architecture, demand-driven video solutions and broadband access equipment. These include various building blocks such as small cells, routers and antennas that are incorporated into equipment and facilities and subsequently utilized by service providers to build networks for end users. Their product portfolio encompasses optical and copper connectivity products, hybrid fiber-coaxial equipment, edge routers, metro Wi-Fi, storage and distribution equipment for cable TV operators, cable and DSL (Digital Subscriber Line) modems, EMTAs (Embedded Multimedia Terminal Adapter), gateways, and set-top boxes.

Some firms within the industry also offer cloud networking and virtualization solutions for data centers and cloud-computing environments along with end-to-end network visibility and analytics that help build, test, certify, maintain and optimize complex physical and virtual networks. These companies employ multiple silicon architecture to offer highly modular networking solutions. Some industry participants offer innovative audio products, including analog and digital microphones and balanced armature speakers, audio processors, and software and algorithms that are used in applications that serve the mobile, ear and IoT markets. A few industry participants even provide glass substrates that are commonly found in LCD TVs, notebooks and flat-panel desktop PC monitors, ceramic substrates for mobile, emission control systems, filter plates for genomics, centrifuge tubes and laboratory filtration products. In addition, some firms offer a digital platform for hands-free communication via secure text messaging, alert and alarm management that effectively solves healthcare communication and workflow challenges.

A couple of leading stocks within the industry are Arista Networks, Inc. (ANET) and Corning Incorporated.

What’s Shaping the Future of Communication Components Industry

Evolution to Demand-Driven Business Model: Telecom service providers are increasingly leaning toward fiber optic cable in order to meet the burgeoning demand for cloud-based business data and video-streaming services by individuals. Moreover, the fiber-optic cable network is vital for backhaul and last mile local loop, which are required by wireless service providers for the deployment of the 5G network. Fiber networks are also essential for the growing deployment of small cells that bring the network closer to the user and supplement macro networks to provide extensive coverage. Higher utilization of advanced routers to deliver data packets from one network to another is gaining prominence, while state-of-the-art antenna systems remain essential architectural components for seamless connectivity. The telecom firms are aiding their customers to move away from an economy-of-scale network operating model to demand-driven operations by offering easy programmability and flexible automation. The industry is well poised to meet these evolving trends, given its technology prowess, product depth and wide applications. An increased pace of 5G deployment and greater demand for seamless data connectivity due to higher broadband utilization owing to increasing work-from-home trend amid the coronavirus pandemic are likely to propel the industry’s growth.

Proliferation of Cloud Networking: The industry participants are transforming the entertainment experience through a holistic approach to content delivery in order to help providers anticipate demand for more personalized, relevant and mobile experiences. Voice-powered interactions are fast emerging as a critical and necessary feature, as consumers tend to engage with technology through natural, spoken commands across the mobile, ear and IoT platforms. This has led to a wide array of products ranging from mobile phones to headsets, and from smart speakers to household appliances. Moreover, the firms offer a variety of pathways for delivering services through a combination of network-based video transcoding, packaging, storage and compression technologies required to deliver new IP video formats and home gateways to connected devices inside and outside the home. Some firms are also benefiting from the expanding cloud networking market, primarily driven by strong demand for scalable infrastructure, which has become necessary for new applications and services. The convergence of network technologies requires considerable investments from both traditional carriers (telecom and cable) and cloud service providers. Apart from delivering high capacity and availability, cloud networking promises predictable performance along with programmability that enables integration with third-party applications for network, management, automation, orchestration and network services.

Scalable Infrastructure Leading to Exponential Rise in Bandwidth: Consumer demand for faster Internet speeds with more capacity continues to grow at an escalating rate, primarily driven by increasing consumption of videos. The wide proliferation of cloud networking solutions is further resulting in increased storage and computing on a virtual plane. As both consumers and enterprises are using the network, there is tremendous demand for quality networking equipment. Moreover, the demand for faster data transfer is fueling growth of optical networks. The industry participants provide the technology to enable customers to manage this exponential bandwidth-development cost effectively through steady investments in state-of-the-art technologies. These include DOCSIS (Data Over Cable Service Interface Specification), DSL and Next Generation PON (Passive Optical Network) platforms that enable service providers to deliver the highest bandwidth to subscribers across any physical connection. Further, some firms are benefiting from innovation in the glass substrate market, enabling panel manufacturers to do away with costs that are usually necessary for making slimmer, lighter and more power-efficient consumer devices.

Zacks Industry Rank Indicates Promising Prospects

The Zacks Communication - Components industry is housed within the broader Zacks Computer and Technology sector. It carries a Zacks Industry Rank #69, which places it among the top 27% of more than 250 Zacks industries.

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates encouraging prospects. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1. The industry’s positioning in the top 50% of the Zacks-ranked industries is a result of positive earnings outlook for the constituent companies in aggregate.

Before we present a few communication component stocks that are well positioned to outperform the market based on a strong earnings outlook, let’s take a look at the industry’s recent stock market performance and valuation picture.

Industry Outperforms Sector and S&P 500

The Zacks Communication - Infrastructure industry has outperformed the broader Zacks Computer and Technology sector as well as the S&P 500 composite over the past year, largely due to near-term tailwinds.

The industry has gained 88.4% over this period compared with the S&P 500 and sector’s rise of 59.2% and 79.5%, respectively.

One Year Price Performance

Industry’s Current Valuation

On the basis of the trailing 12-month price-to-book (P/B) ratio, the industry is currently trading at 4.04X compared with the S&P 500’s 6.7X. It is also below the sector’s trailing-12-month P/B ratio of 9.2X.

Over the past five years, the industry has traded as high as 4.07X, as low as 1.11X and at the median of 2.67X, as the chart below shows.

Trailing 12-Month price-to-book (P/B) Ratio

3 Communication Components Stocks to Keep a Close Eye on

Corning Incorporated: New York-based Corning started out as a glass manufacturer that was reincorporated in 1936. The company has since developed glass technologies to produce advanced glass substrates that are used in a large number of applications across multiple markets. The stock has gained 90.7% in the past year compared with the industry’s rise of 87.4%. The Zacks Consensus Estimate for the current and next year earnings has been revised 14.4% and 12.5% upward, respectively, since June 2020. The company holds a leadership position in each of the markets addressed by its five Market-Access Platforms, namely Mobile Consumer Electronics, Optical Communications, Automotive, Life Sciences and Display. Operating on a strong financial foundation that positions it for long-term growth, Corning is benefiting from improving demand and commercialization of its innovations. The stock carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Price and Consensus: GLW

Viavi Solutions Inc.: Headquartered in San Jose, CA, Viavi is a leading provider of network test, monitoring and service enablement solutions that offer end-to-end network visibility and analytics to help build, test, certify, maintain, and optimize complex physical and virtual networks. It also offers high-performance thin film optical coatings for light-management solutions used in anti-counterfeiting, 3D sensing, electronics, automotive, defense and instrumentation markets. This Zacks Rank #2 stock has gained 59.2% in the past year. The Zacks Consensus Estimate for the current and next-year earnings has moved up 17.9% and 6.4% respectively, since June 2020. Viavi’s wireless and fiber test solutions are in the early stages of a multi-year investment cycle fueled by the transition to superfast 5G networks. The healthy growth traction is further demonstrated by the upside in wireless & fiber test, 3D sensing products, optical transport, Ethernet, broadband access, video test and storage network testing markets.

Price and Consensus: VIAV

Knowles Corporation: Founded in 1946 and headquartered in Itasca, IL, Knowles is a premier provider of advanced micro-acoustic, audio processing and precision device solutions, serving the mobile consumer electronics, communications, medical, defense, automotive and industrial markets. This Zacks Rank #1 stock has gained 76.2% in the past year. The Zacks Consensus Estimate for current-year earnings has been revised 11.5% upward since September 2020. Proprietary manufacturing techniques, rigorous testing and global scale of operations have facilitated Knowles to fine tune its business with the evolving customer demands and invest in high-value solutions to diversify its revenues and increase exposure to high-growth markets. The transformation from an acoustic component supplier to an audio solutions provider has enabled the company to migrate to higher-value solutions and increase content per device. This, in turn, has empowered the company to capitalize on the positive macro trends in audio and edge processing solutions.

Price and Consensus: KN

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