Wireless Non-US Industry Outlook: Growth Prospects Healthy

The Zacks Wireless Non-US industry comprises providers of mobile telecommunication and related services and products for consumer, enterprise and wholesale customers. They offer state-of-the-art voice services, including local calls, domestic and international long-distance calls and roaming services, prepaid and postpaid, and value-added services. The companies also provide wireless Internet service, including digital applications such as music, video and animation, wireline broadband services and wireline voice services through wireline voice networks.

Some of the companies sell various mobile handsets and accessories through dealer network and offers co-billing services to other telecommunication service providers. In addition, some industry participants provide devices and software platform for managing security, mobility and communications among hardware, programs, mobile apps and the Internet of Things (IoT).

Let’s take a look at the industry’s three major themes:

•    The global wireless telecommunications ecosystem has continued to witness considerable growth due to rapid technological advancements, evolving consumers’ need and increasing smart device usage to access real-time data. Wireless carriers across national territories have expanded their service portfolios to include a wide array of offerings to capitalize on growth opportunities across technology, media and telecommunications in areas such as enterprise cloud, TV, IoT, augmented and virtual reality, and autonomous vehicles, among others. However, adjacent market segments tend to offer lower margins, and disruptive competitors are well positioned in key segments such as cloud and advertising. These pose concerns for wireless operators in service portfolio expansion.

•    Broad-based industry growth is expected over the next five years as carriers complete 5G superfast network rollouts and benefit from the burgeoning demand for data services. The majority of wireless subscription addition has stemmed from emerging markets, particularly India, China, Japan and Africa. Markets in developed economies have mostly reached saturation levels, preventing wireless carriers from achieving the subscriber growth rates of their counterparts in emerging economies, and leading them to focus on increasing average revenue per user (ARPU). Latin American countries such as Brazil, Mexico and Argentina are also slated to offer significant opportunities as the degree of penetration of high-speed broadband, 4G services and the usage of smartphones rise. Notably, 4G LTE deployment and network upgrades are the key trend around the world at present, and in select markets there is also massive investment in fixed broadband based on fiber. 5G developments have gained pace and will continue to be a key area of focus in 2019 and beyond.

•    Geographically, the wireless telecommunication services market is divided into seven key regions — North America, Latin America, Eastern Europe, Western Europe, Japan, Asia-Pacific excluding Japan and the Middle East & Africa. North America holds the largest revenue share followed by Europe and Asia Pacific owing to major technology providers based in these regions, and easy adoption of these technologies by the population. Japan, Middle East and Africa, and Latin America hold significant potential for growth in the market, raising demand for wireless services. However, high capital expenditure to extend network infrastructure for mobile connectivity and cut-throat competition is forcing down prices, leading to aggregate lower ARPU for telecom operators.

Zacks Industry Rank Indicates Bright Prospects

The Zacks Wireless Non-US industry is housed within the broader Zacks Computer and Technology sector. It currently carries a Zacks Industry Rank #25, which places it at the top 10% 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 healthy near-term 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 gained confidence in this group’s earnings growth potential. The industry’s earnings estimates for 2019 have been raised 24.5% over the past year.

Before we present a few non-U.S. wireless 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 Underperforms Sector, S&P 500

The Zacks Wireless Non-US industry has underperformed both the broader Zacks Computer and Technology sector and the S&P 500 composite over the past year.

The industry has declined 8.9% over this period against the S&P 500’s rise of 2%. Meanwhile, the broader sector has gained 1%.

One-Year Price Performance

Industry’s Current Valuation

Enterprise value-to-EBITDA (EV/EBITDA) ratio is commonly used for valuing non-U.S. wireless stocks. The industry currently has a trailing 12-month EV/EBITDA of 17.17X compared with the S&P 500’s 10.57X. It is also trading above the sector’s trailing 12-month EV/EBITDA of 10.02X.

Over the past five years, the industry has traded as high as 21.61X, as low as 7.19X with the median of 13.18X, as the chart below shows.

Enterprise Value-to-EBITDA Ratio (Past Five Years)

Bottom Line

Despite short-term headwinds like trade restrictions, the industry is expected to register robust growth on the back of healthy growth dynamics supported by improving macroeconomic and geopolitical picture, technological advancements and rise in customers’ disposable income. This apart, the vast population base of multiple countries, particularly China, India and Japan, coupled with rapid proliferation of smart devices and Internet users will be the key factor responsible for the growth of the telecommunications market worldwide. However, price-sensitive competition for customer retention in core business will likely become more intense in the coming days.

Two stocks in the space currently sport a Zacks Rank #1 (Strong Buy) that investors may consider betting on now. You can see the complete list of today’s Zacks #1 Rank stocks here.

BlackBerry Limited (BB): Shares of this Waterloo, Canada-based non-U.S. wireless firm have gained 16.8% over the past two years. The Zacks Consensus Estimate for the current-year EPS has been revised 23.1% upward over the past 60 days.

Price and Consensus: BB

TIM Participações S.A. (TSU): The consensus estimate for this Rio de Janeiro, Brazil-based non-U.S. wireless firm’s earnings has moved up 34.7% for the current fiscal year, over the past 60 days. The stock has returned 12.8% over the past two years.

Price and Consensus: TSU

We are also presenting two stocks currently carrying a Zacks Rank #2 (Buy) that are well positioned to grow.

China Mobile Limited (CHL): Shares of this Central, Hong Kong-based non-U.S. wireless firm have rallied 19.2% in the past six months. The Zacks Consensus Estimate for the current fiscal-year earnings has climbed up in the past 30 days.

Price and Consensus: CHL

Turkcell Iletisim Hizmetleri A.S. (TKC): The consensus estimate for this Istanbul, Turkey-based non-U.S. wireless firm’s earnings has moved up 3.2% for the current fiscal year, over the past 30 days. The stock has returned 15.7% in the past six months.

Price and Consensus: TKC

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