The U.S. telecommunications industry is presently riding a growth trajectory, and the momentum is likely to continue in 2015 as well. Telecommunications is one of the few industries to have seen rapid technological improvement even during the recession.

Owing to the significance of telecommunications as an infrastructure product, we expect the overall economic dynamics to shift in the industry’s favor. Unprecedented growth in high-speed mobile Internet traffic, in particular of wireless data and video, has transformed the industry into the most evolving, inventive and keenly contested space.

Any new network standard aims at providing faster data connectivity, quick video streaming with high resolution and rich multimedia applications. The rising demand for technically superior wireless products has been the silver lining for the telecom industry in an otherwise tough environment.

The ongoing Advanced Wireless Servies-3 (AWS-3) spectrum auction being conducted by the Federal Communications Commission (FCC) has so far accumulated a record-breaking $45 billion. Unexpectedly high bidding for AWS-3 Spectrum clearly indicates that telecom operators expect the demand for mobile data and video services to rise in the future.

The FCC also plans to conduct a broadcast incentive (spectrum at the hands of TV broadcasters) auction in 2016 to ease the pressure on wireless operators and thereby ensure uninterrupted transmission of data/voice packets.  

The spectrum license winners from different regions will upgrade their respective networks to gain a competitive edge. Wireless network standards are continuously evolving around the globe to offer faster speeds. This in turn will result in increased capital expenditures and a surge in demand is likely to be seen by telecom infrastructure gear manufacturers.

Wireless the Key

Wireless networks are the key for future growth of the overall telecom industry. Long-Term Evolution (LTE), the most sought after next-generation (4G) super-fast wireless communications technology, is rapidly gaining global momentum. Wireless network standards are continuously evolving around the world to offer faster speed.

The significant deployment of 4G LTE networks has made way for wider adoption of LTE-A (Long-Term Evolution Advanced) wireless networks. LTE-A is a more powerful version of the legacy LTE network offering increased speed and network capacity. Carrier aggregation is the most essential part of LTE-A technology as it allows wireless operators to create large spectrum assets by combining different frequency bands.

Mergers & Acquisitions to Continue

The U.S. telecom industry is likely to witness more mergers and acquisitions going forward. Owing to the rising demand for scarce and valuable wireless spectrum, mergers and acquisitions have increased exponentially. While established players need more spectrums to gain competitiveness, small players prefer to collaborate with strong rivals rather than trying to establish a nationwide foothold which is extremely capital intensive.    

In 2014, Verizon Communications Inc.’s (VZ - Analyst Report) takeover of the remaining 45% stake of Verizon Wireless from Vodafone Group Plc. (VOD -Analyst Report) for $130 billion marks the largest acquisition in the wireless industry. In Feb 2014, Comcast Corp. (CMCSA - Analyst Report) had reached an agreement with Time Warner Cable Inc. (TWC - Analyst Report) to acquire the latter in an all-stock deal valued at around $45.3 billion.

Following this, in May 2014, DIRECTV (DTV - Analyst Report) reached a definitive agreement with AT&T Inc. (T - Analyst Report) to sell its business to the latter for $48.5 billion. Both deals are currently awaiting regulatory approval. Additionally, T-Mobile US Inc. (TMUS - Snapshot Report) is another potential takeover target for which DISH Network Corp. (DISH - Analyst Report) may bid in 2015.

Key Attributes for 2015

(1) The telecommunications industry is known for its huge barriers to entry. Deployment of high-speed network infrastructure requires significant capital expenditure, which very few entities can afford.
 
(2) The sector is immune to the sovereign debt crisis in Europe. A potential slowdown in China or any non-U.S. economic fluctuation will not have any immediately impact on this industry.

(3) U.S. telecom carriers have the option to expand globally through acquisitions or partnerships as several emerging nations are installing 3G and 4G networks rapidly. Notably, AT&T has decided to acquire Grupo Iusacell, the third largest wireless operator in Mexico.

Comcast and Liberty Global Plc. (LBTYA), the two leading cable MSOs in the U.S. and Europe respectively, have formed an agreement to offer industry’s first international WiFi roaming connectivity to their subscribers. The cross-continent WiFi interoperability will provide a free alternative to the wireless data roaming facility.

(4) We expect telecom carriers to continue paying handsome dividends in 2015 as well. In 2014, eight major telecom and cable TV operators have paid an average dividend yield of 4.7%. Apart from traditional telecom services, carriers can also offer value-added services, such as securitized data management, cloud computing and mobile banking, to name a few. These new offerings will generate considerable growth for the companies.

(5) We may see more product sharing deals between telecom, cable TV and satellite TV operators as each of these players are trying to gain a foothold in the other’s territory. Even, pay-TV services, offerings to business enterprises, mobile backhaul and metro-Ethernet segments may witness more convergence.  

Zacks Industry Rank - Positive

Within the Zacks Industry classification, Telecommunications is broadly grouped in the Computer and Technology sector (one of the 16 Zacks sectors) and are further sub-divided into twelve industries at the expanded level: Communications Infrastructure, Communications Components, Satellite Communications, Cable TV, Communications Semiconductor, Wireless Equipment Supplier, National Wireless Service Provider, Rural Wireless Operator, Rural Wireline Operator, Non-U.S. Wireless Operator, National Wirleline Operator and Non-U.S. Wireline Operator. The level of sensitivity and exposure to different stages of the economic cycle vary for each industry.

We rank all the 260 plus industries in the 16 Zacks sectors based on the earnings outlook and fundamental strength of the constituent companies in each industry. To learn more visit: About Zacks Industry Rank. As a guideline, the outlook for industries with a Zacks Industry Rank of #88 and lower is 'Positive,' between #89 and #176 is 'Neutral' and #177 and higher is 'Negative.'

The Zacks Industry Rank for Communications Infrastructure is #61, Communications Component is #71, Satellite Communications is #23, Cable TV Operators is #171, Communications Semiconductor is #5, Wireless Equipment Supplier is #73, National Wireless Service providers is #171, National Wireline Operators is #9, Rural Wireless Operators is #214, Rural Wireline Operators is #120, Non-U.S. Wireless Operators is #197 and Non-U.S. Wireline Operators is #205.

Overall favorable rankings of the various telecom industries makes the outlook for the sector positive.

Earnings Trend of the Sector

The earnings picture for the broader Technology sector, of which the telecommunications industry is part, remains on the weak side. We haven’t received any telecom sector results yet, but 9.5% of the Technology sector members in the S&P 500 (SPX) reported fourth-quarter 2014 financial results.
 

For the sector as whole, total earnings are up 5.3% on 6.4% higher revenues, with 66.7% beating earnings estimates and 50% coming ahead of top-line estimates. Relative to what these same companies had reported in other recent quarters, the beat ratios compare favorably while the growth rates are on the weak side. Combining the actual earnings that have come out with estimates for the still-to-come reports, total earnings for the sector are expected to be up 2.9% on 3.9% higher revenues.

>> Continue to Telecom Stock Roundup, Part 2

>> Continue to Telecom Stock Roundup, Part 3