The Zacks Communication - Infrastructure industry appears poised to benefit from healthy growth dynamics driven by President Biden’s multi-billion infrastructure investment plan and solid demand trends as the economy gradually returns to normal after the pandemic-induced adversities. The 5G transition is also expected to be disruptive, creating new avenues for the industry.
Backed by such tailwinds, CommScope Holding Company, Inc. (COMM), Bandwidth Inc. (BAND) and Wireless Telecom Group, Inc. (WTT) are likely to benefit in the long run from higher demand for scalable infrastructure for seamless connectivity amid wide proliferation of IoT, driven by faster pace of 5G deployment.
The Zacks Communication - Infrastructure industry comprises companies that provide various infrastructure solutions for the core, access and edge layers of communication networks. These firms support mission-critical, high-bandwidth applications like cloud-based computing, video, mobile and machine-to-machine connectivity. Leveraging proprietary modeling and simulation techniques to optimize networks, the firms offer high-speed network access solutions for use across Internet protocol, asynchronous transfer mode and time division multiplexed architecture in both wireline and wireless network applications to leading global telecom operators, multi-system operators and enterprise customers. Their product portfolio encompasses optical fiber and twisted pair structured cable solutions, infrastructure management hardware and software, network racks and cabinets, and fiber-to-home equipment like hardened connector systems, couplers and splitters, and hardened optical terminating enclosures.
In addition, some firms provide materials for cellular base station sites and connectivity; indoor, small cell and distributed antenna wireless systems; and wireless network backhaul planning and optimization products and services to improve cellular coverage and capacity in high-traffic areas and places difficult for networks to penetrate. Certain firms within the industry provide data center infrastructure solutions that include colocation space and power, and interconnection services to various enterprise, cloud, carrier and content customers.
What’s Shaping the Future of the Communication - Infrastructure Industry?
Evolution With Changing Demand Patterns: 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 in order to provide additional capacity and ramp up Internet and wireless networks. As a result, 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. At the same time, the industry participants are 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 to cater to the surge in data demand, with digital sustainability becoming the norm of the day as majority of the population is forced to work from home to avoid being exposed to the deadly virus.
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, rural coverage and wireless densification, short-term profitability has largely been compromised. Nevertheless, the industry firms 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 eliminate performance degradation in a cost-effective manner.
Pent-up Demand: The multi-billion infrastructure investment plan by President Biden is likely to boost industry demand. The $2 trillion investment plan over an eight-year period includes a $100 billion provision to significantly expand broadband access to Americans, as the administration aims to fortify its technological prowess to thwart the dominance of countries like China. The plan envisions reaching the underserved areas of the country and prioritizing support for broadband networks affiliated with local governments, nonprofit organizations and cooperatives to encourage strong competition with privately-owned companies. The plan has also earmarked funds for the tribal areas that lack access to high-speed Internet. Furthermore, the U.S. President has allotted $180 billion for R&D and future technologies that are likely to sow the seeds for technology innovation to leapfrog competition against China and South Korea in areas like 5G.
Zacks Industry Rank Indicates Bullish Trends
The Zacks Communication - Infrastructure industry is housed within the broader Zacks Computer and Technology sector. It carries a Zacks Industry Rank #62, which places it at the top 24% 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 encouraging 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 top 50% of the Zacks-ranked industries is a result of positive 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 as well as the S&P 500 composite over the past year.
The industry has risen 41.8% over this period compared with the S&P 500 and the sector’s rise of 49.6% and 60.7%, respectively.
One Year Price Performance
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 8.93X compared with the S&P 500’s 16.46X. It is also below the sector’s trailing-12-month EV/EBITDA of 16.93X.
Over the past five years, the industry has traded as high as 11.99X, as low as 6.73X and at the median of 8.80X, as the chart below shows.
Trailing 12-Month enterprise value-to EBITDA (EV/EBITDA) Ratio
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. The company is pursuing strategies that are focused on reducing operational costs and optimizing the overall cost structure. In an effort to drive growth and efficiency within the organization, CommScope intends to separate its Home Networks business to create an independent publicly traded entity. The tax-free spin-off is part of CommScope NEXT, a long-term growth strategy, which focuses on eliminating redundant processes, and non-value-added complexity and costs to bolster business optimization. Markedly, the spin-off will enable both CommScope and Home Networks to drive innovation while allowing the latter to focus more on go-to-market strategy and develop its own technologies for home and consumer products on the back of a resilient manufacturing model. The acquisition of ARRIS has better positioned CommScope to capitalize on long-term industry growth trends, including network convergence, fiber and mobility everywhere, Internet of Things, and demand for additional bandwidth, low latency and ultra-high reliability. The stock carries a Zacks Rank #2 (Buy) and has gained 62.5% in the past year. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here. With a VGM Score of A, it delivered an earnings surprise of 41.1%, on average, in the trailing four quarters. It has long-term earnings growth expectation of 24.4%
Price and Consensus: COMM
Bandwidth Inc.: Founded in 2000 and headquartered in Raleigh, NC, Bandwidth operates as a Communications Platform-as-a-Service (CPaaS) provider, offering avant-garde software application programming interfaces for voice and messaging services. It is the only application programming interface platform provider that owns a Tier 1 network with enhanced network capacity, primarily catering to business enterprises. Continuous innovation on CPaaS offerings allows enterprise customers to have direct access to Bandwidth’s comprehensive suite of products and services that cater to the networking requirements of large-scale Internet companies and cloud service providers based in the United States. This reinforces pricing flexibility and provides a significant competitive advantage to build a capital-efficient and customized networking infrastructure. Higher demand for work-from-home connectivity solutions amid the coronavirus-induced lockdown is fueling its growth engine. The acquisition of Voxbone complements its product portfolio and enables it to offer a unified software platform to better serve global customers. The stock carries a Zacks Rank #2 and has an earnings surprise of 553.8%, on average, for the trailing four quarters. The stock has gained 18.4% in the past year and has long-term earnings growth expectation of 10%.
Price and Consensus: BAND
Wireless Telecom Group, Inc.: Headquartered in Parsippany, NJ, Wireless Telecom Group manufactures advanced RF and microwave components, modules, systems, and instruments. The company is likely to benefit from the secular trend of 5G deployment across the globe with healthy traction in the fiber LAN ecosystem and robust portfolio of products and services in the wireless connectivity space. The stock has gained 96.8% over the past year. The Zacks Consensus Estimate for its current-year earnings has been revised 14.3% upward since October-end, and the same for the next year is up 33.3%. With customized solutions targeting niche segments of large and growing end markets, WTT is likely to benefit from wide proliferation of 5G, network densification, private networks, and satellite communications. The collaboration agreement with NXP Semiconductors further expands its scale of operations and reach with several monetization opportunities for the high-margin business of software stack for private LTE/5G networks. The stock carries a Zacks Rank #2 and delivered an earnings surprise of 30%, on average, in the trailing four quarters.
Price and Consensus: WTT
A massive push to rebuild the crumbling U.S. infrastructure will soon be underway. It’s bipartisan, urgent, and inevitable. Trillions will be spent. Fortunes will be made.
The only question is “Will you get into the right stocks early when their growth potential is greatest?”
Zacks has released a Special Report to help you do just that, and today it’s free. Discover 7 special companies that look to gain the most from construction and repair to roads, bridges, and buildings, plus cargo hauling and energy transformation on an almost unimaginable scale.
Download FREE: How to Profit from Trillions on Spending for Infrastructure >>
Want 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
Wireless Telecom Group, Inc. (WTT) : Free Stock Analysis Report
CommScope Holding Company, Inc. (COMM) : Free Stock Analysis Report
Bandwidth Inc. (BAND) : Free Stock Analysis Report
To read this article on Zacks.com click here.
Zacks Investment Research