Should You Invest In The Telco Stock Straight Path Communications Inc (NYSEMKT:STRP)?
Straight Path Communications Inc (AMEX:STRP), a USD$2.32B mid-cap, operates in the telecommunications market which continues to face innovations and technological developments, confronting industry incumbents with rapid changes. Telco analysts are forecasting for the entire industry, a somewhat weaker growth of 9.58% in the upcoming year , and a strong near-term growth of 13.92% over the next couple of years. This rate is more than double the growth rate of the US stock market as a whole. Today, I will analyse the industry outlook, as well as evaluate whether Straight Path Communications is lagging or leading in the industry. See our latest analysis for Straight Path Communications
What’s the catalyst for Straight Path Communications’s sector growth?
The convergence that has been talked about is now happening, but driven by disruption rather than well-considered strategies and marketing campaigns. Overall the growth in this segment of the telco industry is stagnating, and often the only way to maintain profitability is through cost-cutting. On the positive side, innovations and technological developments allow these companies to be more cost-competitive. In the previous year, the industry saw growth of 5.74%, though still underperforming the wider US stock market. Straight Path Communications lags the pack with its sustained negative earnings over the past couple of years. The company’s outlook seems uncertain, with a lack of analyst coverage, which doesn’t boost our confidence in the stock. This lack of growth and transparency means Straight Path Communications may be trading cheaper than its peers.
Is Straight Path Communications and the sector relatively cheap?
Telco companies are typically trading at a PE of 17x, relatively similar to the rest of the US stock market PE of 20x. This means the industry, on average, is fairly valued compared to the wider market – minimal expected gains and losses from mispricing here. Furthermore, the industry returned a similar 10.21% on equities compared to the market’s 10.46%, potentially illustrative of a turnaround. Since Straight Path Communications’s earnings doesn’t seem to reflect its true value, its PE ratio isn’t very useful. A loose alternative to gauge Straight Path Communications’s value is to assume the stock should be relatively in-line with its industry.
What this means for you:
Are you a shareholder? Straight Path Communications has been an telco industry laggard in the past year. If your initial investment thesis is around the growth prospects of Straight Path Communications, there are other telco companies that have delivered higher growth, and perhaps trading at a discount to the industry average. Consider how Straight Path Communications fits into your wider portfolio and the opportunity cost of holding onto the stock.
Are you a potential investor? If Straight Path Communications has been on your watchlist for a while, now may be a good time to dig deeper into the stock. Although its growth has delivered lower growth relative to its telco peers in the near term, the market may be pessimistic on the stock, leading to a potential undervaluation. Before you make a decision on the stock, I suggest you look at Straight Path Communications’s future cash flows in order to assess whether the stock is trading at a reasonable price.
For a deeper dive into Straight Path Communications’s stock, take a look at the company’s latest free analysis report to find out more on its financial health and other fundamentals. Interested in other telco stocks instead? Use our free playform to see my list of over 300 other telco companies trading on the market.
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.
