The Zacks Communication - Infrastructure industry appears to be mired in raw material price volatility and supply-chain disruptions due to continued chip shortage and sharp inflationary pressure. Moreover, high capital expenditure for infrastructure upgrades for 5G rollout and margin erosion due to price wars have dented the industry’s profitability.
Nevertheless, CommScope Holding Company, Inc. COMM, Anterix Inc. ATEX and Bandwidth Inc. BAND are likely to benefit in the long run from higher demand for scalable infrastructure for seamless connectivity amid the wide proliferation of IoT, transition to cloud and related next-gen technologies and a faster pace of 5G deployment.
The Zacks Communication - Infrastructure industry comprises firms that provide various infrastructure solutions for the core, access and edge layers of communication networks. Leveraging proprietary modeling and simulation techniques to optimize networks, the firms offer high-speed network access solutions across Internet protocol, asynchronous transfer mode and time division multiplexed architecture in both wireline and wireless network applications. Their product portfolio encompasses optical fiber and twisted-pair structured cable solutions, infrastructure management hardware and software, network racks and cabinets, fiber-to-home equipment like hardened connector systems, wireless network backhaul planning and optimization products, couplers and splitters, indoor, small cell and distributed wireless antenna systems and hardened optical terminating enclosures.
What's Shaping the Future of the Communication - Infrastructure Industry?
Depleted Margins From Demand Erosion: Efforts to offset substantial capital expenditure for upgrading network infrastructure by raising fees have reduced demand, as customers prefer to switch to lower-priced alternatives. Moreover, efforts to build resilient infrastructure facilities to withstand natural catastrophes such as hurricanes and floods add to operating costs. In addition, latent tension between the United States and China relating to trade restrictions imposed on the sale of communication equipment to firms based in the communist country has dented the industry’s credibility and will likely lead to a loss of business. An adverse economic impact from the coronavirus pandemic is also likely to dent the overall revenues of the industry participants.
Volatility in Raw Material Prices: The industry is continuously facing an acute shortage of chips, which are the building blocks for various equipment used by telecom carriers. Moreover, high raw material prices due to inflation, the prolonged Russia-Ukraine war and the consequent economic sanctions against the Putin regime have affected the operation schedule of various firms. Although various steps have been taken to address the global shortage of semiconductor chips and devise ways to increase domestic production, the demand-supply imbalance has crippled operations and largely affected profitability due to inflated equipment prices. The government has also pledged bipartisan support to ramp up production capacity and reduce supply bottlenecks while eliminating dependence on countries like China. However, unless the policy guidelines assume a tangible effect, the industry firms are likely to face short-term challenges, affecting their cash flow.
Transition to Technology Powerhouse: With exponential growth in video and other bandwidth-intensive applications owing to the wide proliferation of smartphones and increased deployment of superfast 5G technology, the industry participants are making considerable investments in LTE, broadband and fiber to provide additional capacity and ramp up the Internet and wireless networks. These companies are rapidly transforming from legacy copper-based telecommunications firms to technology powerhouses with capabilities to meet the growing demand for flexible data, video, voice and IP solutions. The industry participants are also focusing 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. All these efforts have particularly helped firms in the industry cater to the surge in data demand, with digital sustainability becoming the norm of the day.
Network Convergence: The success of 5G hinges on substantial investments to upgrade infrastructure in the core fiber backhaul network to support anticipated growth in data services. With operators moving toward converged or multi-use network structures, combining voice, video and data communications into a single network, the industry is increasingly developing solutions to support wireline and wireless network convergence. Although these investments will eventually help minimize service delivery costs to adequately support broadband competition and expand rural coverage and wireless densification, short-term profitability has largely been compromised. Nevertheless, the industry players have enabled enterprises to rapidly scale communications functionalities to a vast range of applications and devices with easy-to-use software application programming interfaces. The firms support high user volumes without affecting deliverability and cost-effectively eliminate performance degradation.
Zacks Industry Rank Indicates Bearish Trends
The Zacks Communication - Infrastructure industry is housed within the broader Zacks Computer and Technology sector. It carries a Zacks Industry Rank #227, which places it at the bottom 9% 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 bleak 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 bottom 50% of the Zacks-ranked industries is a result of a negative earnings outlook for the constituent companies in aggregate.
Before we present a few communication infrastructure 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 Lags S&P 500 & Sector
The Zacks Communication - Infrastructure industry has lagged the broader Zacks Computer and Technology sector and the S&P 500 composite over the past year.
The industry has lost 62.1% over this period compared with the S&P 500 and the sector’s decline of 12.4% and 30.4%, respectively.
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 7.11X compared with the S&P 500’s 11.91X. It is also below the sector’s trailing-12-month EV/EBITDA of 8.78X.
Over the past five years, the industry has traded as high as 12.05X, as low as 6.21X and at the median of 8.77X, as the chart below shows.
Trailing 12-Month enterprise value-to EBITDA (EV/EBITDA) Ratio
3 Communication - Infrastructure Stocks to Keep a Close Eye on
CommScope Holding Company, Inc.: Headquartered in Hickory, NC, CommScope is a premier provider of infrastructure solutions, including wireless and fiber optic solutions, for the core, access and edge layers of communication networks. Since its inception in 1976, the company has created a niche market for itself, helping customers scale network capacity, delivering better network response time and performance and simplifying technology migration. CommScope is focused on sound technology and a highly efficient supply chain, and is committed to continuous improvement. This will potentially make the company a preferred partner for all telecommunications businesses as the industry moves toward 5G. With operators moving toward converged or multi-use network structures, combining voice, video and data communications into a single network, CommScope is dedicatedly developing solutions designed to support wireline and wireless network convergence, which will be essential for the success of 5G technology. It has been pursuing strategies focused on reducing operational costs and optimizing the overall cost structure. The stock has a long-term earnings growth expectation of 23.9% and delivered an earnings surprise of 16.2%, on average, in the trailing four quarters. CommScope carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Price and Consensus: COMM
Anterix Inc.: Headquartered in Woodland Park, NJ, Anterix offers spectrum assets that enable the modernization of critical infrastructure for the energy, transportation, logistics and other sectors. It is reportedly the largest holder of licensed spectrum in the 900 MHz band throughout the contiguous United States. The company has launched an integrated platform that enables greater resilience and enhanced services between the participating networks, including cybersecurity, shared infrastructure and integration of distributed energy sources. The transition to a broader suite of solutions will ensure greater collaboration, providing more than 75 Anterix Active Ecosystem members with the collective voice of their utility customers. The stock carries a Zacks Rank #3.
Price and Consensus: ATEX
Bandwidth Inc.: Founded in 2000 and headquartered in Raleigh, NC, Bandwidth operates as a Communications Platform-as-a-Service (CPaaS) provider. It is the only application programming interface platform provider that owns a Tier 1 network with enhanced network capacity. Continuous innovation on CPaaS offerings allows enterprise customers to have direct access to its comprehensive suite of products and services. This reinforces pricing flexibility and provides a significant competitive advantage to build a customized networking infrastructure. The acquisition of Voxbone complements its portfolio and enables it to better serve customers. It pulled off an earnings surprise of 143.5%, on average, in the trailing four quarters. This Zacks Rank #3 stock has a VGM Score of B.
Price and Consensus: BAND
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