There are different ways to invest in the telecom sector. Some prefer the hardware makers and some like the telecom service providers. Either way, there is major upside potential in this sector as demand for smart phones, mobile devices like tablets, and voice and data services continue to grow in the future. With this in mind, here is a closer look at some stocks in this sector which have significant upside potential into 2013:
Iridium Communications, Inc., (IRDM) shares look very appealing as an investment to buy now. It operates a network of 66 low-Earth orbiting cross-linked satellites which provides global voice and data communications coverage. While a traditional telecom provider might work for the average phone user, Iridium is a top choice for military, marine, expeditionary and adventure travelers, and many other applications. If you are at sea on a yacht, flying a plane around the world, climbing Mount Everest, at the South Pole, or in another remote part of the world, you will want to have an Iridium phone with you because its satellite phone and data services will work virtually anywhere in the world. Some of the industries that need satellite communications services from Iridium include: maritime, commercial and private aviation, government, military, emergency services, search and rescue, mining, forestry, oil and gas, heavy equipment, transportation and utilities.
Iridium is planning to enhance and expand services to its subscribers in 2015 when it launches the next generation constellation called "Iridium NEXT." It recently announced an agreement with "NAV CANADA" regarding Aireon LLC, which is a joint venture that will allow air traffic management agencies to continuously track aircraft anywhere in the world. Aireon will use Iridium NEXT to provide this tracking coverage, and it is expected to provide substantial benefits to the aviation industry including fuel savings and more safety. NAV CANADA will provide a $150 million investment into the joint venture. Iridium is expecting to see major revenue growth from this new service with annual data fee revenues, in addition to about $200 million in one-time hosting fees that Aireon plans to generate between 2014 and 2017. This project gives Iridium major new growth potential that many investors are not possibly aware of yet.
Iridium recently reported solid financial results. For the third quarter of 2012, net income was $17.8 million or 23 cents per share. This compares favorably with net income of $12 million or 16 cents per share for the same quarter of 2011. Iridium ended the quarter with 595,000 total billable subscribers, which is considerably higher than the 508,000 subscribers it had for the year-ago period. This is also up from the 576,000 subscribers for the previous quarter ended June 30, 2012. Total billable subscribers grew 17% year-over-year. Furthermore, the CEO is bullish about future growth prospects and the company recently stated:
"While 2012 has presented its share of challenges, we remain bullish about our long-term prospects as we head into a year of accelerating growth in 2013," said Matt Desch, CEO, Iridium. "We continue to expect that our M2M, maritime and aviation markets will be an important source of revenue in the next three years, while also extending our leadership position as the premium provider in the handset business. In addition, with new and innovative capabilities in development, we'll supplement already solid growth in our commercial business lines with new sources of revenue."
Some investors and analysts have said in the past that Iridium is a possible takeover target. Harry Rady of Rady Asset Management has included Iridium as one of his top picks for a takeover, and investors know that this sector does have its share of merger and acquisition deals. Because of its technology, low valuation and growth potential, Iridium could be an attractive takeover target for a major telecom company, a tech company, or an aerospace or defense firm, just to name a few.
It's rare to be able to buy the market leader in this industry for such a cheap price of just about 6 times earnings. The recent weakness in the stock price appears to be temporary and caused by a combination of year-end tax-loss selling and a warrant deal, which created a arbitrage situation that invited shorts to press the shares lower. However, those issues are fading, and the stock now appears poised to rebound into 2013, as the warrant deal has now closed and tax-loss selling ends on December 31.
Some very smart investors have invested in Iridium, and Glenn Tongue of Deerhaven Capital, who used to be Whitney Tilson's investment partner at T2 Capital, recently made a very bullish case for investing in Iridium. You can see his presentation on the stock here. He believes the new Aireon joint venture could be worth $4 per share alone to Iridium and says that if the stock were valued at 8 times EBITDA (many in this industry are trading at 9 to 10 times), page 47 of his presentation states the shares are worth about $12.50 now and continue to rise to between $17.50 to $25.30 in 2016 and $23.40 to about $32.20 in 2017. In conclusion, he likes this stock and company because it has huge barriers to entry, rapid growth, significant operating leverage, and since it is not widely followed yet, it trades at a major discount to its peers and the rest of the market. With a solid balance sheet, new growth potential from Aireon, a possible rebound from the end of tax loss selling, and a very cheap valuation at just 6 times earnings, investors should put this stock on their buy list for the major upside potential it has into 2013 and beyond.
Key Data Points For Iridium From Yahoo Finance:
Current Share Price: $6
52-Week Range: $5.25 to $9.73
2012 Earnings Estimate: 83 cents per share
2013 Earnings Estimate: 94 cents per share
P/E Ratio: about 6 times 2013 earnings estimates
Sprint Nextel Corp (S) shares have surged in the past few months as investors shrugged off concerns about high debt levels and continuing losses. The company also reported good news when Softbank recently said it would buy about 70% of Sprint, which will further strengthen its financial resources. Sprint also announced another big deal when it said it would buy the rest of Clearwire (CLWR) (it already owns about 50% of the company) for about $2.2 billion or $2.97 per share. Sprint expects this deal to give it more bandwidth for data services and for the transaction to close in mid-2013. Clearwire shares doubled when this deal was announced and Sprint shares have remained strong. With Clearwire shares trading at $2.90 and the deal price set at $2.97, it makes sense for Clearwire investors to sell now rather than hold on for a few more months to get what is likely to be just about 7 more cents in profit. Investing proceeds from Clearwire into other stocks that offer more upside potential makes sense, and if for some reason regulatory approval was not granted on the deal and it fell through, Clearwire shares could see a sharp drop.
Growing data usage from mobile phone customers has created major demand for bandwidth for carriers like Sprint, AT&T (T) and Verizon (VZ). Sprint is the third largest wireless phone company in the United States, and it continues to take steps to remain competitive with the larger competitors. It launched next-generation 4G LTE services in several major U.S. markets earlier this year. It offers a wide variety of mobile devices including tablets and the popular iPhone. While this stock has more than doubled off the lows of 2012, some risks remain. The company has posted losses in 2012, and analysts expect Sprint to post a loss of about 79 cents per share in 2013. However, Sprint CEO Dan Hesse has managed this company through some significant challenges in the past, and the recent deals with Softbank and Clearwire appear to greatly reduce the financial risks and add to this company's growth potential. Analysts appear to be getting more bullish on Sprint shares, and Argus Research Company recently set a $7.50 price target and upgraded it from a hold to a buy rating. With Sprint now trading around $5, this could provide investors with gains of nearly 50%. While that would be an attractive gain, I prefer Iridium shares because both stocks trade for about the same price, however, Iridium is solidly profitable while Sprint is not.
Key Data Points For Sprint From Yahoo Finance:
Current Share Price: $5.50
52-Week Range: $2.10 to $6.04
2012 Earnings Estimate: a loss $1.45 per share
2013 Earnings Estimate: a loss of 79 cents per share
P/E Ratio: n/a due to losses
Nokia Corporation (NOK) was once the leader in the mobile phone industry, and it sold many units and made huge profits. While it is still a leader in terms of volume, profits have been elusive as margins have been impacted by stiff competition. With many consumers wanting the latest iPhone, the average smart phone has become more of a low-margin commodity that has to compete with many other options. However, the mobile phone business is constantly shifting and consumer demand can rapidly shift from one company to another. In the past several years, there have top-selling phones from Motorola, Apple (AAPL), Nokia, and others, and investors should expect major shifts in the future.
Nokia is working on ways to get back on top. It recently introduced its latest "Lumia" smart phone, which was completely sold out soon after its launch.The Lumia 920 phone is powered by Microsoft's Windows 8, and it features a large touch screen and many features like a wireless phone charger, a 28mm auto-focus camera and many others. If Nokia can build on this successful launch and expand the apps it offers, it might be able to see a return to profits sooner than some expect. While Apple is raking in big profits, the market is large enough for more than one smart phone maker to prosper. Nokia has posted losses in recent quarters, but that financial concern has been somewhat mitigated by a strong balance sheet that has about $12 billion in cash and around $6.75 billion in debt. Nokia's solid balance sheet, new products and globally recognized brand name gives it turnaround potential in the long term. The shares are well off the 52-week lows now, but still have solid upside potential. On December 6, analysts at Northland Securities reiterated an outperform rating on Nokia shares and set a $6 price target. Investors who buy at the current price of about $4 could end up with 50% gains if the $6 price target is reached.
Key Data Points For Nokia From Yahoo Finance:
Current Share Price: $4
52-Week Range: $1.63 to $5.87
Dividend: 18 cents, which yields 4.4%
2012 Earnings Estimate: a loss of 35 cents per share
2013 Earnings Estimate: a loss of 6 cents per share
P/E Ratio: n/a due to losses
While all of these stocks have significant upside potential, it appears that Iridium is the best value at current levels. Both Sprint and Nokia have more than doubled off of the lows of 2012, and losses are expected to continue at those well-known companies. Iridium shares have not yet doubled off the 2012 lows, but they should, especially with this stock trading for about the same as Sprint while offering investors about $1 per share in earnings power for 2013 and significant upside and growth in the coming years.
Data is sourced from Yahoo Finance. No guarantees or representations are made. Please consult a financial advisor before making investments.
Disclosure: I am long IRDM.