3 Communication Stocks Set to Ride Against Market Uncertainty

Zacks01-02

The Zacks Diversified Communication Services industry appears mired in high capital expenditures for 5G infrastructure upgrades, unpredictable raw material prices, supply-chain disruptions amid the ...

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However, the industry is likely to benefit in the long run from an accelerated 5G rollout and increased fiber densification. Amid such uncertain market conditions, Deutsche Telekom AG DTEGY, Telefonica, S.A. TEF and Telefonica Brasil S.A. 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However, the industry is likely to benefit in the long run from an accelerated 5G rollout and increased fiber densification.  Amid such uncertain market conditions, Deutsche Telekom AG DTEGY, Telefonica, S.A. TEF and Telefonica Brasil S.A. VIV should benefit from higher demand for scalable infrastructure for seamless connectivity amid the wide proliferation of IoT and transition to cloud network.\nIndustry Description\nThe 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.\nWhat's Shaping the Future of the Diversified Communication Services Industry?\nDemand Erosion: 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 year over year, 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.Soaring 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.Customized Services: To improve profitability, the companies increasingly focus 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. 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.Short-Term Margins Compromised: Video and other bandwidth-intensive applications have witnessed exponential growth owing to the wide proliferation of smartphones and increased deployment of the superfast 5G technology. This has forced the industry participants to invest considerably in LTE, broadband and fiber to provide additional capacity and ramp up the Internet and wireless networks. These companies are rapidly transforming themselves from legacy copper-based telecommunications firms to technology powerhouses with capabilities to meet the growing demand for flexible data, video, voice and IP solutions. 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. Although these infrastructure investments are likely to be beneficial in the long run, short-term profitability has largely been compromised.\nZacks Industry Rank Indicates Bearish Prospects\nThe Zacks Diversified Communication Services industry is housed within the broader Zacks Utilities sector. It carries a Zacks Industry Rank #162, which places it in the bottom 35% of more than 250 Zacks industries.The group’s Zacks Industry Rank, which is the average of the Zacks Rank of all the member stocks, indicates bleak 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. 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.\nIndustry Lags S&P 500, Sector\nThe Zacks Diversified Communication Services industry has lagged the S&P 500 composite and the broader Zacks Utilities sector over the past year due to macroeconomic headwinds.The industry has declined 16.3% over this period compared with the S&P 500’s and the sector’s growth of 25.3% and 9.7%, respectively.One-Year Price Performance\n\nIndustry's Current Valuation\nOn 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 9.2X compared with the S&P 500’s 18.36X. It is also trading below the sector’s trailing 12-month EV/EBITDA of 14.76X.Over the past five years, the industry has traded as high as 18.45X, as low as 9.17X and at the median of 12.98X, as the chart below shows.Trailing 12-Month enterprise value-to EBITDA (EV/EBITDA) Ratio\n\n3 Diversified Communication Services Stocks to Watch\nDeutsche 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 poised 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. It has a long-term earnings growth expectation of 12.5%. It has a VGM Score of A. The stock has gained 24.1% in the past year. Deutsche Telecom 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: DTEGY\nTelefonica: Based in Madrid, Spain, Telefonica provides mobile and fixed communication services in Europe and Latin America. In recent years, Telefonica has invested heavily in the deployment and transformation of its network to provide excellent connectivity in terms of capacity, speed, coverage and security. The rollout of fiber and LTE is set to drive considerable growth. The company has launched 5G+ (5G SA) in Spain, Brazil, Germany and the United Kingdom and plans to increase the 5G SA coverage in core markets by 2025. The Zacks Consensus Estimate for current-year earnings has been revised upward by 6.5% since December 2023. This Zacks Rank #2 stock has a VGM Score of B. The company delivered a trailing four-quarter earnings surprise of 36.6%, on average.  Price and Consensus: TEF\n \nTelefonica Brasil: Based in Sao Paulo, Brazil, Telefonica Brasil is the subsidiary of Spain-based telecom giant Telefonica SA. The company has been actively investing in technology upgrades and broadband network expansion to retain competitiveness in the rapidly changing market. Its unique value proposition, coupled with excellent customer experience, should help it register net additions in postpaid. Telefonica Brasil has a long-term earnings growth expectation of 16.6% and delivered a trailing four-quarter earnings surprise of 10%, on average. It has a VGM Score of A. It carries a Zacks Rank #3 (Hold).Price and Consensus: VIV\n\nWant the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report\nDeutsche Telekom AG (DTEGY) : Free Stock Analysis Report\nTelefonica Brasil S.A. (VIV) : Free Stock Analysis Report\nTelefonica SA (TEF) : Free Stock Analysis Report\nTo read this article on Zacks.com click here.\nZacks Investment Research","kind":"highlight","is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"1","news_tag":"","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.4","shortVersion":"4.29.4","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2500749429"}