The US telecom industry has been at the forefront of innovation. The growth in mobile internet traffic, notably in the wireless data has been the key driver of its growth over the last 5 years. Going forward, the demand for wireless data will be higher, as the personal computing industry is moving towards mobile devices such as tablet PCs and smart phones with wireless data capabilities.
It is estimated that consumers will be using 30 times more mobile data in 2015 compared to 2009. In fact, the historical growth rate of the mobile data usage is phenomenal. It grew 250% over the last two years alone. The robust growth is due to popular streaming apps such as iPlayer and YouTube.
The attractiveness of this market invites more players to join the bandwagon. Some of the companies are also entering the markets they operate, especially in the telephone business for small and business enterprises. Expect shorter product life cycles as telecommunication players will be coming out with new products and services, and as consumer flock to find the best deals available.
Given that telecom companies are exposed to high debt levels and higher capital spending in the future, free cash flows may be slower relative to past performance. Investors should pick the telephone companies with aggressive marketing efforts to lure consumers. Cutthroat competition will result in the elimination of smaller and weaker players.
There are a lot of opportunities in the industry, but only available to the bigger and stronger players. Mergers and acquisitions will also increase with the need to achieve economies of scale and pricing power. I will discuss the first quarter subscriber growth for different telephone companies to uncover trends for the major US telephone companies. Major US telephone companies reported weaker results because of the lack of newer products and the lower numbers of mobile users upgrading to a higher mobile handset.
AT&T (T) reported that it added 187,000 subscribers, slightly lower than analyst estimates of 193,000. The weaker result is due to the fewer iPhone sales. Around 187,000 of its 726,000 current subscribers were contract-based, and most of them came from the launch of the new iPad. However, tablet users usually pay less than its cellphone phone consumers.
It said it sold 5.5 million smartphones and activated 4.3 million iPhones. According to the company, the percentage of its subscribers upgrading their mobile phones declined to 7% for the quarter. This is slower than the 9% growth during the same period last year. Also, this is lower than the 12% growth in the fourth quarter of last year.
Verizon (VZ) also reported lower subscriber growth this quarter. It said it added 501,000 contracts in the quarter, down from the additions of 1.2 million in the fourth quarter of last year. It said that it sold 3.2 million iPhones for the quarter and 2 million phones using its Long Term Evolution technology.
The silver lining is that the Apple iPhone is an effective driver of subscriber growth despite a big subsidy from Verizon. Mobile carriers have argued that the iPhone increases customer loyalty, encourages device upgrades and eventually improve revenue visibility.
Sprint (S) reported that it added 263,000 subscribers. This is down from the 1.8 million subscriber growth from the previous quarter. Around 44% of its new customers were iPhone contracts. Excluding these iPhone customers, Sprint would have lost theoretically by 400,000 customers. However, this is not as significant drop compared to rivals Verizon and AT&T. It said that it sold 9 million iPhones and activated 1.5 million mobiles.
Near-Term Catalysts for Telco will support growth
There are visible near-term catalysts for the US telecommunications industry. The US Congress has decided to free up for next generation wireless network to meet the increasing growth of mobile devices. The new spectrum is expected to lead to a host of new technologies such as the super Wi-Fi, which would have longer range and faster wireless connectivity.
Another catalyst will be innovation and improved technology. With the huge proliferation of smart phones, tablets and other pocket-sized mobile devices raised demand of wireless data. Given the increasing need for data, there's an opportunity in international markets. Mobile carriers that expand into world markets will have cushion from local weakness in its home country.
Majority of the major telephone companies are trading at low end of double digit valuations. Despite the slower than expected subscriber growth, the market seems to discount the possibility of higher profitability from the various tailwinds the industry is experiencing.
AT&T is valued at 14 times 2012 earnings and carries a dividend yield of 5.20%. Analysts expect that its earnings will grow by 10% for the next 5 years. This appears higher than the decline in earnings by 6% a year over the last 5 years. This translates to a price earnings over growth ratio of 1.47 times.
Verizon is trading at 17 times 2012 earnings. It has a dividend yield of 4.80%. Analysts estimate that its earnings will growth by 11% for the next 5 years. This is also a reversal from the decline in earnings by 3% a year for the last 5 years. The stock has price earnings over growth ratio of 1.5 times. Sprint is still in the red. Analysts expect a loss of $1.53 per share this year, translating to 30% growth this year. Over the next 5 years, it is expected to grow its earnings by 6%.
On the other hand, smaller telecommunications players have lower multiples. For example, USA Mobility (USMO) trades at 5 times earnings and carries a dividend yield of 7.90%. MetroPCS (PCS) is valued at 8 times earnings.
Overall, communication players have declined by 7% year to date. Despite this performance, the economic prospects of these telephone companies appear good. In the long-run, this will deliver strong shareholder returns through dividends and capital appreciation.