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3 Communication Stocks Likely to Gain From Scalable Demand
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The Zacks Diversified Communication Services industry is likely to benefit from the diminishing supply chain adversities, increased fiber densification and accelerated 5G deployment across the globe. However, high capital expenditures for 5G infrastructure upgrades, unpredictable raw material prices, inflationary pressures and elevated inventory levels amid a challenging macroeconomic environment and uncertain market conditions have dented the industry’s profitability.
Nevertheless, Swisscom AG (SCMWY - Free Report) , Deutsche Telekom AG (DTEGY - Free Report) and Telecom Italia S.p.A. (TIIAY - Free Report) should benefit in the long run from higher demand for scalable infrastructure for seamless connectivity amid the wide proliferation of IoT and transition to cloud and related next-gen technologies.
Industry Description
The Zacks Diversified Communication Services industry comprises firms that provide a wide array of communication services, including wireless, wireline and Internet, to business enterprises and consumers. These companies offer mobile and wireline telephone services, high-speed Internet, direct-to-home satellite television and other value-added services. In addition to providing integrated information and communications technology services to businesses and governments, some of these companies operate as local exchange carriers or full-service providers of data center colocation and related managed services in state-of-the-art data center facilities. Some industry participants also provide IP networks, private lines, network management and hosting services, along with sales, installation and maintenance of major branded IT and telephony equipment.
What's Shaping the Future of the Diversified Communication Services Industry?
Transition to Indigenous Software-Defined Networks: The industry participants are investing considerably in LTE, broadband and fiber to provide additional capacity and ramp up the Internet and wireless networks to meet exponential video and data demand. These companies are rapidly transforming themselves from legacy copper-based telecommunications firms to technology powerhouses. At the same time, the industry participants continue to focus on leveraging wireline momentum, expanding media coverage, improving customer service and achieving a competitive cost structure to generate higher average revenue per user while attracting new customers. Also, these firms offer the flexibility to better manage data traffic by leveraging indigenous software-defined networks to enable low-latency, high-bandwidth applications for faster access to data processing.
Demand Erosion for Legacy Services: Efforts to offset substantial capital expenditure for upgrading network infrastructure by raising fees have reduced demand, as customers tend to switch to lower-priced alternatives. Moreover, local-line access for traditional telephony services continues to decline among large customers due to higher wireless substitution and migration to IP-based services. This is reflected in the persistent erosion in overall network access services on a year-over-year basis, hurting revenues of local and long-distance operations. In addition, a shift toward wireless services and the aggressive rollout of VoIP and long-distance services by Tier-1 competitors have resulted in access line erosion. These adverse impacts have become more pronounced with the soft economic recovery in China and the prolonged Russia-Ukraine war.
Customized Service Offering: To improve profitability, the companies are increasingly focusing on providing support services to various small and mid-sized businesses (SMBs) with an integrated portfolio of voice, data and technology services. The firms are tailoring their services to suit individual business needs and are facilitating SMBs to better adapt themselves to necessary technology advancements. At the same time, the industry is battling hard-to-mitigate operating risks stemming from volatility in demand, an unpredictable business environment and challenging geopolitical scenarios by offering free services to low-income families and seamless wireless connectivity to the masses.
Escalated Raw Material Prices: Although the supply chain woes have declined progressively, the industry continues to face a dearth of chips, which are the building blocks for various equipment used by telecom carriers. Moreover, high raw material prices due to inflation and economic sanctions against the Putin regime have affected the operation schedules of various firms. Extended lead times for basic components are also likely to hurt the delivery schedule and escalate production costs. The demand-supply imbalance has crippled operations and largely affected profitability due to inflated equipment prices.
Zacks Industry Rank Indicates Bullish Trends
The Zacks Diversified Communication Services industry is housed within the broader Zacks Utilities sector. It carries a Zacks Industry Rank #44, which places it in the top 17% 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 near-term 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 a positive earnings outlook for the constituent companies in aggregate.
Before we present a few diversified communication stocks that are well-positioned to outperform the market based on a relatively modest earnings outlook, let’s take a look at the industry’s recent stock market performance and valuation picture.
Industry Lags S&P 500, Outperforms Sector
The Zacks Diversified Communication Services industry has lagged the S&P 500 composite but has outperformed the broader Zacks Utilities sector over the past year largely due to macroeconomic headwinds.
The industry has lost 15.7% over this period against the S&P 500’s gain of 4.6% and the sector’s decline of 17.5%.
One Year Price Performance
Industry's Current Valuation
On the basis of the trailing 12-month enterprise value-to-EBITDA (EV/EBITDA), which is the most appropriate multiple for valuing telecom stocks, the industry is currently trading at 12.22X compared with the S&P 500’s 13.45X. It is trading below the sector’s trailing 12-month EV/EBITDA of 16.96X.
Over the past five years, the industry has traded as high as 18.44X and as low as 8.36X and at the median of 13.03X, as the chart below shows.
Trailing 12-Month enterprise value-to EBITDA (EV/EBITDA) Ratio
3 Diversified Communication Services Stocks to Keep an Eye on
Swisscom: Headquartered in Bern, Switzerland, Swisscom offers mobile and fixed-network telecommunications services across the country and Italy. A wealthy domestic market with stable economic conditions, a relatively lax regulatory environment compared to the EU, its dominant market position and a strong leadership team are some of the key growth drivers of the company. With a complete spectrum of state-of-the-art data services, from leased lines to integrated solutions for corporate and residential customers, Swisscom’s healthy growth momentum is likely to continue. The Zacks Consensus Estimate for current-year and next-year earnings has been revised upward by 23.2% and 19.7%, respectively, since August 2022. 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: SCMWY
Deutsche Telekom: Headquartered in Bonn, Germany, Deutsche Telecom is one of the largest telecommunications service providers in Europe. In addition to its strong position in the domestic market, the company is likely to benefit from the accretive post-merger integration of T-Mobile US Inc. and Sprite in the United States, in which it owns about 43% stake. The removal of forced cable TV access in multiple dwelling units in Germany through telecom legislation is likely to help the company expand its broadband market. Moreover, an aggressive fiber rollout strategy across the country is expected to augment its domestic market hold. The Zacks Consensus Estimate for current-year earnings has been revised 21.9% upward over the past year. It has a long-term earnings growth expectation of 5.7%. The stock has gained 7.2% in the past year. Deutsche Telecom carries a Zacks Rank #2.
Price and Consensus: DTEGY
Telecom Italia: Headquartered in Rome, Italy, Telecom Italia offers mobile communication, fixed-line communication and broadcasting services worldwide. The company also has a controlling interest in TIM Brazil. The stabilization in domestic business, underpinned by cost reduction initiatives and market pricing rationality, is the primary growth driver for Telecom Italia. The Zacks Consensus Estimate for current-year earnings has been revised upward by 57.1% since August 2022. The stock carries a Zacks Rank #2.
Price and Consensus: TIIAY
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3 Communication Stocks Likely to Gain From Scalable Demand
The Zacks Diversified Communication Services industry is likely to benefit from the diminishing supply chain adversities, increased fiber densification and accelerated 5G deployment across the globe. However, high capital expenditures for 5G infrastructure upgrades, unpredictable raw material prices, inflationary pressures and elevated inventory levels amid a challenging macroeconomic environment and uncertain market conditions have dented the industry’s profitability.
Nevertheless, Swisscom AG (SCMWY - Free Report) , Deutsche Telekom AG (DTEGY - Free Report) and Telecom Italia S.p.A. (TIIAY - Free Report) should benefit in the long run from higher demand for scalable infrastructure for seamless connectivity amid the wide proliferation of IoT and transition to cloud and related next-gen technologies.
Industry Description
The Zacks Diversified Communication Services industry comprises firms that provide a wide array of communication services, including wireless, wireline and Internet, to business enterprises and consumers. These companies offer mobile and wireline telephone services, high-speed Internet, direct-to-home satellite television and other value-added services. In addition to providing integrated information and communications technology services to businesses and governments, some of these companies operate as local exchange carriers or full-service providers of data center colocation and related managed services in state-of-the-art data center facilities. Some industry participants also provide IP networks, private lines, network management and hosting services, along with sales, installation and maintenance of major branded IT and telephony equipment.
What's Shaping the Future of the Diversified Communication Services Industry?
Transition to Indigenous Software-Defined Networks: The industry participants are investing considerably in LTE, broadband and fiber to provide additional capacity and ramp up the Internet and wireless networks to meet exponential video and data demand. These companies are rapidly transforming themselves from legacy copper-based telecommunications firms to technology powerhouses. At the same time, the industry participants continue to focus on leveraging wireline momentum, expanding media coverage, improving customer service and achieving a competitive cost structure to generate higher average revenue per user while attracting new customers. Also, these firms offer the flexibility to better manage data traffic by leveraging indigenous software-defined networks to enable low-latency, high-bandwidth applications for faster access to data processing.
Demand Erosion for Legacy Services: Efforts to offset substantial capital expenditure for upgrading network infrastructure by raising fees have reduced demand, as customers tend to switch to lower-priced alternatives. Moreover, local-line access for traditional telephony services continues to decline among large customers due to higher wireless substitution and migration to IP-based services. This is reflected in the persistent erosion in overall network access services on a year-over-year basis, hurting revenues of local and long-distance operations. In addition, a shift toward wireless services and the aggressive rollout of VoIP and long-distance services by Tier-1 competitors have resulted in access line erosion. These adverse impacts have become more pronounced with the soft economic recovery in China and the prolonged Russia-Ukraine war.
Customized Service Offering: To improve profitability, the companies are increasingly focusing on providing support services to various small and mid-sized businesses (SMBs) with an integrated portfolio of voice, data and technology services. The firms are tailoring their services to suit individual business needs and are facilitating SMBs to better adapt themselves to necessary technology advancements. At the same time, the industry is battling hard-to-mitigate operating risks stemming from volatility in demand, an unpredictable business environment and challenging geopolitical scenarios by offering free services to low-income families and seamless wireless connectivity to the masses.
Escalated Raw Material Prices: Although the supply chain woes have declined progressively, the industry continues to face a dearth of chips, which are the building blocks for various equipment used by telecom carriers. Moreover, high raw material prices due to inflation and economic sanctions against the Putin regime have affected the operation schedules of various firms. Extended lead times for basic components are also likely to hurt the delivery schedule and escalate production costs. The demand-supply imbalance has crippled operations and largely affected profitability due to inflated equipment prices.
Zacks Industry Rank Indicates Bullish Trends
The Zacks Diversified Communication Services industry is housed within the broader Zacks Utilities sector. It carries a Zacks Industry Rank #44, which places it in the top 17% 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 near-term 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 a positive earnings outlook for the constituent companies in aggregate.
Before we present a few diversified communication stocks that are well-positioned to outperform the market based on a relatively modest earnings outlook, let’s take a look at the industry’s recent stock market performance and valuation picture.
Industry Lags S&P 500, Outperforms Sector
The Zacks Diversified Communication Services industry has lagged the S&P 500 composite but has outperformed the broader Zacks Utilities sector over the past year largely due to macroeconomic headwinds.
The industry has lost 15.7% over this period against the S&P 500’s gain of 4.6% and the sector’s decline of 17.5%.
One Year Price Performance
Industry's Current Valuation
On the basis of the trailing 12-month enterprise value-to-EBITDA (EV/EBITDA), which is the most appropriate multiple for valuing telecom stocks, the industry is currently trading at 12.22X compared with the S&P 500’s 13.45X. It is trading below the sector’s trailing 12-month EV/EBITDA of 16.96X.
Over the past five years, the industry has traded as high as 18.44X and as low as 8.36X and at the median of 13.03X, as the chart below shows.
Trailing 12-Month enterprise value-to EBITDA (EV/EBITDA) Ratio
3 Diversified Communication Services Stocks to Keep an Eye on
Swisscom: Headquartered in Bern, Switzerland, Swisscom offers mobile and fixed-network telecommunications services across the country and Italy. A wealthy domestic market with stable economic conditions, a relatively lax regulatory environment compared to the EU, its dominant market position and a strong leadership team are some of the key growth drivers of the company. With a complete spectrum of state-of-the-art data services, from leased lines to integrated solutions for corporate and residential customers, Swisscom’s healthy growth momentum is likely to continue. The Zacks Consensus Estimate for current-year and next-year earnings has been revised upward by 23.2% and 19.7%, respectively, since August 2022. 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: SCMWY
Deutsche Telekom: Headquartered in Bonn, Germany, Deutsche Telecom is one of the largest telecommunications service providers in Europe. In addition to its strong position in the domestic market, the company is likely to benefit from the accretive post-merger integration of T-Mobile US Inc. and Sprite in the United States, in which it owns about 43% stake. The removal of forced cable TV access in multiple dwelling units in Germany through telecom legislation is likely to help the company expand its broadband market. Moreover, an aggressive fiber rollout strategy across the country is expected to augment its domestic market hold. The Zacks Consensus Estimate for current-year earnings has been revised 21.9% upward over the past year. It has a long-term earnings growth expectation of 5.7%. The stock has gained 7.2% in the past year. Deutsche Telecom carries a Zacks Rank #2.
Price and Consensus: DTEGY
Telecom Italia: Headquartered in Rome, Italy, Telecom Italia offers mobile communication, fixed-line communication and broadcasting services worldwide. The company also has a controlling interest in TIM Brazil. The stabilization in domestic business, underpinned by cost reduction initiatives and market pricing rationality, is the primary growth driver for Telecom Italia. The Zacks Consensus Estimate for current-year earnings has been revised upward by 57.1% since August 2022. The stock carries a Zacks Rank #2.
Price and Consensus: TIIAY