4 Telecom Stocks Looking Promising Ahead of Q3 Results

Telecommunication is a necessary utility. The need for telecom in both rural and urban areas, and its role in the infrastructure of both developed and developing markets, will continue to grow. For that, the telecommunications industry has been identified as a major driver of the global economic recovery.

Momentum to Continue

The rising demand for technologically superior products has been the silver lining for the telecommunication industry in an otherwise tough environment. Uninterrupted advancement in telecom technologies helped telecom operators to adopt newer business models in order to boost revenues.

These include new pricing plans, a shift from unlimited data usage to tier-based data usage, and higher upgrade fees for smartphones and tablets. In fact, the average revenue per user (ARPU) for most telecom carriers has been rising over the last two years. It is also expected to grow in the long term on the back of massive growth in mobile data usage.

New Growth Areas

We expect wireless networks to provide the primary impetus to the telecom industry. Wireless network standards are continuously evolving around the globe to offer faster speed. After significant growth of the next-generation 4G LTE network deployment, LTE-A (Long-Term Evolution Advanced) wireless network standard is gradually gaining a strong foothold.

In the wireline front, large telecom operators are increasing targeting small and mid-sized business customers with high-speed Internet access through their fiber-optic based network at attractive prices.    

Growth of software-defined networking (SDN) and network function virtualization (NFV) encouraged telecom operators to invest heavily in the communications infrastructure market. SDN provides customers increased bandwidth utilization, higher reliability and reduced capital spending.

Meanwhile, NFV is designed to consolidate and deliver the networking components needed to support a fully virtualized infrastructure – including virtual servers, storage and even other networks. It utilizes standard IT virtualization technologies.

Additionally, the cloud-managed WiFi market has become a major growth driver for telecom operators as increasing number of large and mid-sized business enterprises are adopting this technology. The machine-to-machine (M2M) wireless communications technology has been significantly driving mobile data revenues for wireless service providers.

Finally, as operators direct their investments toward LTE access, the introduction of advanced services such as voice-over-LTE (VoLTE) has become increasingly important.

Our Picks

A recovering economy speeds up demand for real-time voice, data and video manifold. The escalation in demand has also encouraged telecom service providers to undertake large network extensions while upgrading plans at the same time.

At this stage, we believe investors should choose stocks which carry a favorable Zacks Rank to cash on future growth. Taking these factors into account, we present four such stocks with a Zacks Rank #2 (Buy) for investors to consider:

Verizon Communications Inc. VZ: The largest telecom service provider in the U.S. has delivered double-digit operating income and earnings growth for six consecutive quarters. At the end of the second quarter of 2014, Verizon provided 104.6 million retail wireless connections including 98.6 million retail postpaid connections. The company exited the quarter with 5.4 million FiOS Video customers and 6.3 million FiOS Internet subscribers.

For the third quarter of 2014, the Zacks Consensus Estimate for earnings stands at 93 cents, reflecting year-over-year growth of 20.35%. The Zacks Consensus Estimate for revenues pegged at $31.71 billion, up 4.72% year over year.

For fiscal 2014, the Zacks Consensus Estimate for earnings stands at $3.55, indicating year-over-year growth of 24.89% while that for revenues poised at $126.32 billion, up 4.79% year over year.

T-Mobile US Inc. TMUS: The fourth largest telecom operator in the U.S. ended the second quarter of 2014 with approximately 50.5 million subscribers. Deutsch Telekom, the parent company of T-Mobile US, has been looking for a suitable buyer for its US operations for the last 3 years. Nothing concrete has emerged so far.

For the third quarter of 2014, the Zacks Consensus Estimate for earnings stands at 8 cents, reflecting year-over-year growth of a whopping 302.27%.  Meanwhile, the consensus estimate for revenues stands at $7.46 billion, up 11.53% year over year.

For fiscal 2014, the earnings estimate stands at 48 cents, indicating year-over-year growth of an enormous 500.0% while that of revenues is $29.24 billion, up 39.05% year over year.

United States Cellular Corp. USM: The eighth largest wireless carrier in the U.S. exited the second quarter of 2014 witha retail customer base of 4,653,000.The company has taken a number of strategic steps to accelerate growth which includes introduction of a new billing system, continuous rollout of LTE, enhancement of LTE handsets and the completion of various spectrum transactions.

For the third quarter of 2014, the Zacks Consensus Estimate for earnings stands at a negative 27 cents, reflecting a year-over-year decline of 125.0%. However, the estimate for revenues stands at $980 million, up 4.37% year over year.

For fiscal 2014, the Zacks Consensus Estimate for earnings is pegged at a negative $1.12, indicating a year-over-year improvement of 34.5%. The same for revenues stands at $3.87 billion, down a slight 1.35% year over year.

Telephone & Data Systems Inc. TDS: The company is a leading diversified telecom service provider operating in 36 states. At the end of the second quarter of 2014, the company had 597,000 wireline residential customers, 365,500 wireline commercial customers and 150,700 cable connections, bringing the total subscriber base to 1.1 million.   

For the third quarter of 2014, the Zacks Consensus Estimate for earnings stands at a negative 7 cents, reflecting a year-over-year improvement of 22.22%. The same for revenues is pegged at $1.25 billion, up 5.59% year over year.

For fiscal 2014, the Zacks Consensus Estimate for earnings stands at a negative 65 cents, highlighting a year-over-year improvement of 60.61%. The Zacks Consensus Estimate for revenues stands at $4.92 billion, up slightly by 0.43% year over year.

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