The U.S. telecom sector is undergoing a dramatic shift as major carriers work toward bringing 5G technology to the markets.
Touted as a game changer, 5G technology is expected to significantly improve internet surfing speeds and the data transfer process. Major players in the telecom industry, including AT&T (T, Financial) and Verizon (VZ, Financial), are testing their 5G offerings and plan to launch them in select U.S. cities as early as the end of this year.
Moreover, along with positive industry-specific trends, optimistic economic factors such as a reduced corporate tax rate are adding to the sector’s bullish case. President Donald Trump’s blessing in the form of a reduced corporate tax rate at the end of 2017 resulted in way higher free cash flows, which these telecom majors are utilizing for their 5G research and development expenses.
Moving on to the topic at hand, several market pundits believe AT&T is a bargain currently. The stock is down approximately 14.3% this year and touched a six-year low in July. While there are a number of factors that contributed to the stock's massive decline, the Street is concentrating on the overblown fear relating to the overall telecom sector’s performance.
While factors such as growing price competition for wireless services and the possibility of rising interest rates are negative for the telecom sector, especially since it is a capital-intensive business, industry experts believe the positives greatly outweigh the negatives. As discussed previously, experts foresee massive demand for 5G internet, which AT&T plans to introduce in nine U.S. cities by the end of the year.
While AT&T's short-term performance has been poor as a result of its $85 billion acquisition of Time Warner Inc., analysts expect the tables to turn in the company's favor. In addition to adding to its top and bottom lines and expanding its footprint, shareholders will benefit from the synergies produced from leveraging HBO content and AT&T ad sales
"We have a tremendous amount of great projects already in the funnel that, as the HBO team and Richard [Plepler, HBO Chairman] would describe it, they have not been in the position to say 'yes' to because of constraints on certain resources,"Ă‚ John Stankey, CEO of AT&T's new WarnerMedia division, said.Ă‚ "What we are attempting to do is open up those constraints on very high, top quality projects that we think will balance out the schedule so we have a more engaging experience with HBO throughout the course of the year."Ă‚
Coming to numbers, the telecom major reported earnings of 91 cents per share for the second quarter, beating Thomson Reuters' estimates of 85 cents. Revenue of $38.99 billion, however, fell short of estimates of $39.39 billion. Adding to the agony, wireless net additions increased by 73,000. The Street had projected 83,300 additions.
As a result, the stock fell to a six-year low of $30.4 on July 24.Ă‚
Trading at a forward price-earnings ratio of 9.38, compared with the industry median of 19.53, the stock appears to be a bargain. Moreover, its price-earnings ratio for the trailing 12 months stands at 6.47, below the industry median of 19.33. Its operating margin of 14.11%, which is above the industry median of 10.31%, also makes it seem like a good bet.
Owing to these numbers and industry trends with regard to 5G, AT&T seems like a good value play for the long term. With the internet of things-managed services market is expected to register a 15.3% compound annual growth rate between 2016 and 2022, AT&T and other telecom players’ 5G offerings will be a revolutionary play in the sector.
Disclosure: I do not own any of the stocks mentioned.
