Telecoms Outpace Tech Stocks In July; For How Long?
Tech stocks might have led indexes to new highs this year, but in July, telecoms displaced tech stocks as the leading S&P 500 performers. Telecoms rose 5.1%, eclipsing the tech sector’s 4.1% gain and doubling the S&P 500’s gains, according to The Financial Times.
While tech stock showed weakening signs, investors favored AT&T Inc. The Financial Times noted strong results from both AT&T and Verizon this past week that compensated for concerns about heightened competition from smaller players like Spring Corp. and T-Mobile US.
Verizon operates in 150 countries and is the world’s second largest telecom behind China Mobile Ltd., and the largest in the United States, according to Investopedia.
Its market value was estimated at $191.72 billion as of April 2017, with of $131.8 billion, according to Forbes. The company formed in 2000 as a result of a merger between Bell Atlantic Corp and GTE Corp. In 2015, Verizon acquired AOL following a purchase the previous year of Vodafone’s 45% interest stake in Verizon stock.
Verizon reported second quarter revenue that surpassed expectations last week as the company attracted more subscribers with its unlimited data plan.
In the quarter, Verizon added 614,000 subscribers, including tablet customers, compared to an increase of 615,000 in the year-earlier period. The additions exceeded the JPMorgan estimate of 115,000 and consensus expectations of 70,000, JPMorgan analysts said in a research note.
Second quarter net income rose to $4.36 billion, or $1.07 per share, from $702 million, 17 cents per share, a year earlier.
Total operating revenue rose to $30.55 billion from $30.53 billion a year earlier.
Adjusted earnings per share of 96 cents on revenue of $29.91 billion are expected, according to Thomson Reuters I/B/E/S.
AT&T Inc. is the world’s third largest telecom and the second largest in the U.S. with a market value of $245.58 billion. The company provides voice services in more than 200 countries and has more than 34,000 Wi-Fi hotspots. According to its website, AT&T serves more than 355 million people. It recently expanded AT&T GigaPower, a fast Internet service, to 56 metropolitan locations in the U.S., with plans for further expansion. In 2006, the company acquired BellSouth. In 2014, it purchased DirecTV $48.5 billion, allowing the company to provide customers the option to bundle more services into the same package.
AT&T Inc.’s stock looks poised to regain its 2017 high after the company on Tuesday delivered its first earnings bear in five quarters, noted investorplace.com. The stock rose as much as 3% in the after-hour session Tuesday, breaking above $37 on strong volume due to better-than- expected second quarter of 2017 results.
The company’s second-quarter earnings were 79 cents per share, up from 72 cents a year ago, with revenue declining 1.7% to $39.8 billion. Wall Street was looking for a profit of 74 cents on $39.80 billion in revenue. Wireless revenue was flat at $9.73 billion, while legacy voice and data service revenue declined by about 16% year over year to $3.5 billion.
AT&T was still able to meet expectations even as it continues to scale back in consumer mobility and legacy wirelines business.
Telecom Competition Intensifies
Telecom competitors expanded consumers’ access to unlimited data plans, The Financial Times noted. Colby Synesael, a Cowen analyst, said a rebound in subscriber metrics unexpectedly boosted the telecom industry’s wireless revenue, which surpassed analysts’ estimates.
Whether Level 3 Communications and CenturyLink continue to rise could depend on quarterly results released following Wednesday’s close of trading.
Level 3 Communications
Level 3 Communications Inc. reported strong results for the second quarter as its bottom and top lines beat the Zacks Consensus Estimate.
Net income on a GAAP basis in the quarter was $154 million, 42 cents per share, compared to $156 million or 44 cents per share in the year-ago quarter. But quarterly adjusted earnings per share of 42 cents outpaced the Zacks Consensus Estimate of 39 cents. The bottom line declined 19.23%.
Total second-quarter 2017 revenue was $2,061 million, up 0.24% year over year and above the Zacks Consensus Estimate of $2,059.5 million.
Century Link Inc.
CenturyLink Inc. had mixed results in the second quarter of 2017. The bottom line fell short of the Zacks Consensus Estimate, while the top line surpassed it.
CenturyLink’s second quarter net income was $17 million or 3 cents per share, compared to $196 million or 36 cents in the year-ago quarter. Adjusted earnings per share of 46 cents missed the Zacks Consensus Estimate of 49 cents. In addition, the bottom line fell 26.98% on a year-over-year basis.
Second quarter operating revenue was $4,090 million compared to $4,398 million in the prior-year quarter. The decline can be attributed to a drop in legacy revenues and the revenue reduction from the colocation sale effective May 1. But the top line surpassed the Zacks Consensus Estimate of $4,085 million.
Quarterly operating expenses were $3,723 million, down 1% year over year. Operating income, meanwhile decreased to $367 million from $647 million in second-quarter 2016. Operating income margin was 9.0% versus 14.7% in the year-ago quarter.
Adjusted EBITDA excluding special items fell to $1,316 million from $1,634 million in 2016’s second quarter on account of a decline in operating revenues. Lower operating expenses partially offset the decline. Adjusted EBITDA margin was 32.2% versus 37.2% in the year-ago quarter.
Are Telecoms Bargains?
Investors could be bargain hunting the sector since the telecom index is one of only two wider sectors to post declines so far in 2017, the other being energy. Energy posted slight gains in July, pushed by a rise in crude prices that bottomed out in June.
Telecom’s surge stems in part from being undervalued when highly valued tech stocks have slowed or fallen as investors reconsider the market’s outlook. The next sustained decline could test whether telecoms have longer staying power or fall with other sectors.
To evaluate a telecom, it is important to consider metrics affecting that industry, according to Investopedia.
Telecom Evaluation Metrics
Average return per user (ARPU) is critical for telecoms because it illustrates a company’s operational performance. The company’s ability to maximize profits and minimize costs involved in servicing customers is important. Since these companies are service providers rather than product manufacturers, investors must consider marginal profit and cost per unit to determine how well the company uses its resources. The higher the average return, the better.
Telecoms that offer bundling services usually have a higher ARPU.
Churn, often reported quarterly, measures the number of subscribers who leave the company. A low churn rate is desirable. Companies with a high churn rate face more pressure to generate revenue from other areas or gain new clients.
A telecom’s future growth also relies heavily on its ability to grow its customer base. Hence, subscriber growth is a critical metric. A solid subscriber growth rate reflects a competitive telecom that is keeping up with technology trends, keeping customers satisfied and attracting new ones.
In evaluating any stock, investors need to consider earnings before interest, taxes, depreciation and amortization, free cash flow and debt-to-equity, according to Investopedia. Evaluating a stock also requires a specific understanding of the company’s sector and industry, in addition to knowledge about the forces affecting companies in the same category.