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Which Telecommunications Services companies are best positioned to benefit over the long term?
As seasoned observers of the Telecommunications Services Industry are well aware, the domestic wireline voice sector matured long ago and, thanks to wireless and Internet competition, is in a state of contraction. The U.S. wireless sector is currently trending toward maturity. Within that sector, use of voice service is declining and pricing is difficult. There are, however, growth opportunities available to the telecoms. The proliferation of mobile devices is driving demand for data service. Too, integrated telcos are expanding broadband and corporate enterprise offerings. Also, though not now a key focus, company investment overseas may eventually increase. Below, we identify which telcos are best situated, competitively, and hold the greatest investment appeal.
Over the past two decades, the wireline business has lost considerable market share, as evidenced by falling access line counts, to convenient mobile wireless and economical Internet/broadband (e.g., texting, Voice over Internet Protocol) means of communication. In this mature segment of the industry, companies have regionalized and consolidated their networks and downsized back-office operations to maximize efficiency and support profitability.
The wireline telcos are focused on managing their businesses for cash flow generation. Integrated companies, such as AT&T (T - Free AT&T Stock Report), Verizon Comm. (VZ - Free Verizon Stock Report) and Sprint Nextel (S), can use this cash flow to maintain service quality, keep finances healthy and expand into attractive growth venues. Smaller, rural companies, including CenturyLink (CTL) and Windstream (WIN), use cash for the same reasons but, of particular importance to income investors, they use it to maintain generous dividends and yields. We view the latter two telcos as solid long-term income producers, considering their proven ability to consolidate acquisitions and develop competitive broadband and business service operations.
Among the integrated telecoms, AT&T and Verizon Comm. stand out as favorable long-term growth & income investments. Industry deregulation allowed these companies to consolidate wireline assets. AT&T is made up of the former Ameritech, BellSouth, Pacific Telesis, SBC Comm. and Southern New England Telephone entities. Verizon encompasses the old Bell Atlantic, Nynex, GTE, Alltel and MCI businesses. During the past several years, the two telcos have shed wired networks not contiguous with core service territories. Cash flows, in the billions, have helped to finance wireless and broadband operations.
Verizon Wireless, a Verizon Comm./Vodafone Group (VOD) joint venture with 93.2 million subscribers (as of September 30, 2010), is the biggest provider of cellular service in the U.S. AT&T Wireless, having 92.8 million accounts, is in second place, followed by Sprint Nextel, with 48.8 million accounts, and T-Mobile USA, a Deutsche Telekom (DT) subsidiary, with 33.8 million customers.
In the latest September quarter, AT&T’s subsidiary added a net 2.6 million subscribers to its total. Much of this strong performance may be attributed to the telco’s exclusive agreement with Apple Inc. (AAPL) to market the popular iPhone with wireless service. Verizon signed up 997,000 accounts in the period, a respectable showing. Starting this January, Verizon will be able to offer the iPhone on its network, which, along with good customer adoption of the Motorola (MOT) Droid lineup, should give a lift to the base. Sprint brought in 644,000 new customers in the interim, thanks to the success of another smartphone, the HTC (HTCXF.PK) EVO, and multi-brand prepaid service; a de-emphasized Nextel brand was a drag (of 383,000) on this performance. T-Mobile added 137,000 accounts in the quarter, with prepaid growth offsetting postpaid losses.
Going forward, AT&T, Verizon Wireless and Sprint, with their broad national networks, should continue to have access to the most advanced smartphones, tablets and other mobile devices, lending them a competitive edge. Data service will be the primary growth driver over the next 3 to 5 years. Demand for data ought to lift revenue and help to limit postpaid contract account turnover. It should be noted, though, that MetroPCS (PCS) is building a nice market share. This telco offers a very appealing service plan that includes all fees and taxes under a single monthly price. Roaming pacts, the inclusion of smartphones and the introduction of fourth-generation, Long-Term Evolution technology further enhance Metro’s appeal in the market. PCS stock looks to be a good long-term growth holding.
At this juncture, domestic telcos have not expressed a substantial interest in foreign telecom markets. That is not to say that managements aren’t aware of the favorable overseas growth potential, especially in China, India and other developing countries in Africa and Asia. Indeed, earlier this year AT&T held talks with Reliance Comm. of India about taking a significant stake in the wireless carrier. Those talks did not produce any concrete deal. It’s true that current U.S. wireless market penetration is close to 100%, but this level should easily be exceeded over the next few years. This is possible since an increasing number of people own more than one phone. Sweden and South Korea are two nations with penetration already measurably above 100%.
There’s also a few more years of growth left in the domestic broadband market, before the telcos need to expand overseas. The U.S. penetration rate in this segment is only approaching 30%, leaving good long-term business potential. The Netherlands, with a rate near 40%, is the most mature market.
Investors wanting to benefit from developing nation economic expansion, however, have two appealing growth stocks to choose from, those of America Movil (AMX) and NII Holdings (NIHD). America Movil, with a majority stake in Telefonos de Mexico and full ownership of Telmex Internacional, is working to extend integrated (wireless, wireline, broadband and video) service across its Latin America territory. NII is focused on the lucrative South American business segment. Brazil, Chile and Peru are particularly attractive growth markets for the companies.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.