Are Telecoms Red Hot Right Now?

The telecommunications industry is rapidly evolving. With AT&T T in the middle of acquiring T-Mobile, the landscape for data communication seems to be changing everyday. TNS TNS is a telecom company that operates internationally and caters to a variety of clients. Considering that the telecom sector has performed worse, on average, than the S&P 500, should investors consider purchasing TNS?

Based on the Vanguard Telecommunication Services ETF VOX, telecoms have been very volatile, especially since the middle of July. What incentive do investors have to pick a telecom company, especially TNS out of all the ones available? Unlike many other small telecom companies, TNS reported impressive earnings, reporting actual EPS of $0.61 versus an estimate of $0.53. It also reported revenues of $142.7 million versus an estimate of $141.3 million. It also boosted next quarter's EPS forecast. Considering just how excited management is going into the future, shareholders may consider feeling the same way as well.

When looking at the financial statements, TNS appears to be decisively increasing its top line. Quarter over quarter, revenues have been continuously increasing. Despite the plethora of competitors and the uncertain economic condition, TNS appears to be resilient, gathering market share whenever it can. It has also managed to keep cost of goods sold stagnant, which means its gross margins have been widening as well. Similarly, its operating expenses have been fairly minimal, resulting in wider operating margins. In 2011, the net income figure has been fairly consistent, but may break out given the influx of business that TNS has experienced.

Cash flows have also been strong in 2011, continuously increasing over time. Over the last five quarters, depreciation and amortization have been exceptionally high, and if we discounted operational cash for D/A, cash flows overall have been continuously increasing. Capital expenditures have been fairly consistent as well, which could be a sign of continued growth. TNS has also been able to pay back debt in a timely manner. Ultimately, TNS' balance sheet has been fluctuating as expected. With continually increasing capital expenditures and lowering cash, assets have contracted slightly. On the flip side, short-term and long-term debt have been decreasing as well. The firm has also been able to decrease other liabilities. Investors need to keep in mind, however, that its capital structure could still be complicated, as it appears to have a high debt-load.

Investors may consider TNS as a long telecom play. It seems to be creating business despite being in a competitive industry and waning macroeconomic performance. Investors should look deeper into the company's capital structure along with its management team and actual product line before making an investment decisions.

TNS is currently trading at $20.20, down about 3.25% for the year.