Seeking A Few Good Calls
Investors who avoid the telecom sector may be missing out.
To be sure, with the global economy weak and earnings under pressure, now is not the time to load up on the group. Still, volatility has created opportunities in select telecom names. Keep an eye on the big picture, as it provides insight on where to find opportunities.
• Blue chip, diversified telecom-service providers are often viewed as relatively safe havens because of their modest sensitivity to economic conditions.
• Many telecom stocks sell at reasonable valuations and boast attractive dividend yields. The average dividend-paying stock in the S&P 1500 Index yields 3.1%, versus 5.5% for the average telecom stock.
• Many telecom firms generate fairly steady revenue and cash flow. Firms have aggressively trimmed costs to boost profit margins.
• New economic-stimulus packages could help jump-start growth. The government has set aside about $7.2 billion for spending on high-speed broadband infrastructure.
• The near-term profit outlook is dismal. Of the 49 telecom-services and telecom-equipment companies in the S&P 1500 Index, 30 are expected to report lower per-share earnings in the current fiscal year.
• Many telecom companies carry lots of debt and were hit hard by the credit crunch.
• An uncertain outlook for capital spending has reduced visibility on orders and backlogs. Meanwhile, increased regulation could boost competition and weigh on sales.
The wireless area offers the best opportunities in the telecom sector, for at least three reasons. First, the industry’s underlying growth prospects are bright, reflecting steady expansion into underpenetrated regions and foreign markets. Second, wireless service has become more of a staple than a discretionary expense and should prove less sensitive to volatile consumer-spending trends. Third, the trend of replacing land lines with wireless service should continue. The three stocks reviewed below offer attractive ways to cash in on wireless.
NII Holdings ($19; NIHD), a provider of mobile-communications services to business customers in Latin America, has carved out an attractive niche. While currency depreciation has hampered revenue growth, the near-term outlook remains intact, reflecting expansion in Brazil. The company is showing solid user growth, adding more than 266,000 net subscribers in the March quarter. NII is a Focus List Buy.
Qualcomm ($43; QCOM), capitalizing on the aggressive rollout of next-generation networks, is a dominant player among makers of wireless equipment. The company sells its microchips for use in mobile phones and wireless infrastructure around the world. Sizable investments in research and development should spark product growth and preserve Qualcomm’s technology leadership, allowing the company to build market share. Qualcomm is a Long-Term Buy.
Syniverse Technologies ($15; SVR), a leading provider of equipment and services to wireless-telecom providers, is benefiting from increased data and messaging traffic. The company helps manage and connect disparate voice and data systems for more than 650 communications companies, up from 388 at the end of 2006. A growing client list, expanding international presence, and healthy cash flow should sustain growth. Syniverse is rated Best Buy in Upside, a sister publication of the Forecasts that focuses on small stocks.