Morgan Stanley Remains Cautious On Telecom Services Sector, Expects In-Line 2Q Results

Ahead of the release of quarterly numbers by telecom services companies, Morgan Stanley said it remains cautious of the sector, blaming the caution on secular growth trends, intense competition and regulatory risk.

Macro And Micro Conditions

The firm noted that the sector benefited from macroeconomic conditions, as lower interest rates drove traders in droves to defensive stocks. Additionally, the USD strength is also supporting the space. These duo of factors, according to Morgan Stanley, has led to outperformance of telecom services stocks in the year-to-date period.

However, on the micro level, Morgan Stanley sees risks of slow growth, competitive pressure and regulatory uncertainty. The firm expects in-line results from these companies due to the EIP adoption benefiting wireless margins. Morgan Stanley also expects low upgrade rates ahead of an iPhone refresh.

The Sector As A Whole

The firm also said it is keeping a tab on the regulatory calendar, given that the 600 Mhz auction proceeds to the next stage and the FCC's stance on Special Access, Set Top Box reform, privacy and net neutrality. The brokerage added that it is paying close attention to the U.S. presidential elections, which will determine the fiscal and regulatory programs of the next administration. The company also sees burgeoning promotional activity ahead of the back to school season.

Specific Names

While remaining overweight on telecom infrastructure stocks, including the three tower companies, namely American Tower Corp AMT, Crown Castle International Corp CCI and SBA Communications Corporation SBAC; fiber providers Level 3 Communications, Inc. LVLT and Zayo Group Holdings IncZAYO; CyrusOne Inc CONE and Communications Sales & Leasing Inc CSAL, Morgan Stanley also recommends Verizon Communications Inc. VZ and AT&T Inc. T among large carriers.

Citing concerns about broadband competition and the need for higher capital expenditure, Morgan Stanley said it is turning more negative on RLEC companies. Specifically, the brokerage downgraded Frontier Communications Corp FTR and Centurylink Inc CTL.