Positive Wireless National Stock Outlook Exudes Confidence

The Zacks Wireless National industry primarily comprises companies that provide a comprehensive range of communication and business solutions. These include wireless, local exchange, long-distance, data/broadband and Internet, video, managed networking, wholesale and cloud-based services. The firms within the industry offer IP-based voice and data services, multiprotocol label switching networking, data center and managed services, hosting services and communications systems to businesses and government agencies. In addition, the firms provide edge computing services that allow businesses to route application-specific traffic to where they need it and where it’s most effective — whether in the cloud, the network or on their premises. Also, the companies provide high-speed Internet, voice and digital television services to residential customers in rural and urban areas.

Few firms within the industry offer targeted advertising services, leveraging data insights to reach specific audiences at scale in trusted, premium content environments. Some even provide film, television, cable networks and publishing operations with significant media assets in the portfolio. Few industry participants further offer wireless devices, such as smartphones, tablets and other mobile communication devices and accessories manufactured by various suppliers.

Here are the three major themes in the industry:

•    The firms within the industry are increasingly seeking diversification from legacy telecom services to more business, enterprise and wholesale opportunities. Consequently, the companies are making significant investments to upgrade network and product portfolio, including considerable advances in software-defined wide area network capabilities and a new Cloud Core architecture. This is realigning the wireless network toward a software-centric model to meet increasing business demands and customer needs. The companies remain focused on bringing improved operational efficiencies through network simplification and rationalization, thereby improving end-to-end provisioning time and driving standardization. At the same time, they are offering the flexibility to better manage the data traffic by leveraging indigenous software-defined network to enable low-latency, high-bandwidth applications for faster access to data processing. Utilizing machine learning techniques and more connected devices, these are likely to transform the way data-intensive images are transferred across the industry on a real-time basis.

•    Most of the industry participants are deploying the latest 4G LTE Advanced technologies to deliver faster peak data speeds and capacity for customers, driven by customer-focused planning, disciplined engineering and constant strategic investment. The companies are also expanding their fiber optics networks to support 4G LTE and upcoming 5G wireless standards as well as wireline connections. Fiber-optic cable network is vital for backhaul and last mile local loop, which are required by wireless service providers for 5G deployment. 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. Further, leading firms within the industry have already launched next-generation 5G wireless residential broadband services in multiple U.S. markets, while a full-phased 5G wireless network is likely to be offered in 2020 for a seamless transition among Wi-Fi, LTE and 5G services. As the 5G ecosystem evolves, customers are expected to experience significant enhancements in coverage, speeds and devices.

•    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. Moreover, the firms offer a variety of pathways for delivering services through a combination of network-based video transcoding, packaging, storage and compression technologies to deliver new IP video formats and home gateways to connected devices inside and outside home. In addition, some sector firms are reinventing online advertising by pooling a unique set of assets — valuable consumer data and insights, advanced advertising capabilities and engaged passionate fanbases. This has led to a faster turnaround of advertising campaigns, enabling marketers to access and understand the efficacy of these messages in weeks instead of months. These, in turn, are giving a new dimension to their business models.

Overall, the industry appears poised to benefit from healthy growth dynamics, favorable industry drivers and inherent sector strength.

Zacks Industry Rank Indicates Bullish Prospects

The Zacks Wireless National industry is housed within the broader Zacks Computer and Technology sector. It carries a Zacks Industry Rank #75, which places it at the top 29% 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 outperforms 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. Looking at the aggregate earnings estimate revisions, it appears that analysts have reposed faith in this group’s earnings growth potential. The industry’s earnings estimates for 2019 have improved 2.6% over the past year.

Before we present a few communication components 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 Trumps Sector, S&P 500

The Zacks Wireless National industry has outpaced the broader Zacks Computer and Technology sector and the S&P 500 composite over the past year largely due to increased pace of 5G deployment and underlying solid growth potential.

The industry has rallied 10.2% over this period compared with the S&P 500 composite and sector’s rise of 6.2% and 3%, respectively.

One Year Price Performance

Industry’s Current Valuation

On the basis of trailing 12-month enterprise value-to EBITDA (EV/EBITDA) ratio, which is the most appropriate multiple for valuing telecom stocks, the industry is currently trading at 6.79X compared with the S&P 500’s tally of 11.11X. It is also below the sector’s trailing-12-month EV/EBITDA of 11.2X.

Over the past five years, the industry has traded as high as 11.56X and as low as 5.97X and at the median of 6.77X, as the chart below shows.

Trailing 12-Month enterprise value-to EBITDA (EV/EBITDA) Ratio

Bottom Line

The industry is well poised to benefit from the continued deployment of 5G technologies, fiber optics and massive proliferation of data traffic. However, issues related to the trade war remain a latent threat, although the resumption of bilateral trade talks portrays optimism about a likely long-term solution.

One stock in the space currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here. We are also presenting two stocks with Zacks Rank #2 (Buy) and one stock with Zacks Rank #3 (Hold) that are well positioned to grow.

United States Cellular Corporation (USM): Based in Chicago, IL, this wireless national telecom service provider has a trailing four-quarter average positive surprise of 79.3%. The Zacks Consensus Estimate for current fiscal-year earnings for this Zacks Rank #1 stock has moved up 109.2% in the past year, while that for the next fiscal has increased 96.3%.

Price and Consensus: USM

GCI Liberty, Inc. (GLIBA): Founded in 1979 and headquartered in Englewood, CO, this wireless national telecom service provider has gained a solid 32.8% in the past year. The Zacks Consensus Estimate for current fiscal-year earnings for this Zacks Rank #2 stock has moved up an astronomical 1,691.7% in the past year.

Price and Consensus: GLIBA

Verizon Communications Inc. (VZ): Based in New York, NY, this Zacks Rank #2 wireless national telecom service provider has gained a healthy 14.9% in the past year. The Zacks Consensus Estimate for the current fiscal-year earnings has moved up 1.9% since March-end.

Price and Consensus: VZ

CenturyLink, Inc. (CTL): Based in Monroe, LA, this Zacks Rank #3 wireless national telecom service provider has a trailing four-quarter average positive surprise of 13.2%. The Zacks Consensus Estimate for the current and next fiscal-year earnings has moved up 24.5% and 22.6%, respectively, in the past year.

Price and Consensus: CTL

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