The Wall Street...'s  Instablog

The growth of the smart phone and tablet device market in the United States, at first powered by Apple's (AAPL) iPhone, is now becoming more competitive and driving significant valuation changes in both wireless carrier and wireless device stocks.

James D. Breen, of William Blair & Company, is a Wall Street Journal "Best on the Street" analyst. He sees the rise of the smart phone as a squeeze on wireless carrier profits. In this January 23rd interview from a report in the Wall Street Transcript, Mr. Breen states:

"With the advent of the iPhone and the Google (GOOG) Android platform, really the handset providers are the ones stirring the pot with consumers and saying, "OK, here's this new device, we're going to give you this; here's what you could do with it if the carriers improve their network quality." It phases a portion of the carrier's full capex into the network and to upgrade speeds at the same time that they are forced to subsidize more expensive smartphones. So from a cash flow perspective, it's a little bit of a squeeze."

This wireless carrier cash squeeze in the United States could lead to more rapid valuation changes as bandwidth rich, cash poor companies become targets for larger rivals that have additional spectrum requirements.

Jonathan Chaplin of Credit Suisse (CS) is also considered a Best on The Street telecom analyst by The Wall Street Journal. In a recent interview Mr. Chaplin stated that Clearwire (CLWR) is going to become bandwidth bait as the spectrum squeeze plays out:

"Clearwire is the one company out there with massive amounts of unused spectrum, and we think that their spectrum is going to increase in value significantly as data demand increases…

AT&T is going to need more spectrum. T-Mobile is going to need more spectrum. Leap (LEAP) and MetroPCS, (PCS), who had planned to buy spectrum, need more spectrum. So it creates a tremendous amount of demand for Clearwire's very scarce asset."

While the wireless carriers get squeezed for bandwidth, device manufacturers have also seen a big shake up in their sector. Kulbinder Garcha, a Managing Director at Credit Suisse with responsibility for global telecom equipment and IT hardware equity research, put it succinctly in this late January interview:

"You have to remember we are looking at an industry now that has the best part of about 5.7 billion mobile subscriptions out of 6.7 billion of the people in the world."

Mr. Garcha approves of investing in the current trends, with Apple being one of his favorite picks and Nokia (NOK) and Research in Motion (RIMM) falling further behind. Mr. Garcha is direct in his recommendations to investors: "Research In Motion has some real difficulties in terms of turning around their business…One of the things about Apple I think that's important to remember is that they only supply 230 carriers today, and globally Nokia and RIM supply 500 carriers. In other words, Apple is still building out their distribution."

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

“The overall top-line trend is PetSmart (PETM) sales-wise has performed well through the economic downturn. Sales widely outperformed most other discretionary chains. I think that reflects to some extent the nondiscretionary piece of PetSmart's business. One way of saying it is that 40% of their business is pet food. Generally speaking, even in tough economies, people don't change their patterns of buying pet food. They don't feed their pets less or even change the food they feed them, generally. So that's what holds PetSmart's earnings up so well.

“The other really big piece of why PetSmart has performed so well, I think, is because the management team was early to adopt the slower growth, higher cash flow model. You have a few years of very high store growth, but now they're opening a much smaller number of stores. They are looking at about a 4% pace on opening new locations. That is obviously a low-single-digit-type percent pace. At the same time, they are controlling costs better, generating more cash and buying back stock. You see a lot of other retailers follow this philosophy as well lately, but PetSmart was early to that model. This new strategy has helped to take a lot of risk out of the PetSmart investment story.”

“IDEXX is a very unique company; it's a hybrid. It has a very strong med-tech focus coming from its instruments and consumables segment, and it's further diversified by the fact that it has a strong international focus, with roughly 40% of its revenue stream derived from non-U.S. sales. Both of these areas of animal health care are growing.

“On the med tech front, veterinarians are increasingly moving towards, as we were just talking about, more testing and more pet-side testing, first and foremost to drive this whole idea of higher-quality clinical care and faster clinical care. And it has the added benefit of a secondary revenue stream.

“So all of a sudden, you are seeing a lot more interest around in-clinic, pet-side care to drive the value proposition not only to the pet owner but to the veterinarian. IDEXX is really leading this charge, which I believe is really a paradigm shift in the delivery of care through its suite of analyzers that essentially create an in-house clinic.

“In many ways, the sustained economic weakness in the U.S. likely accelerated this trend. Instead of a vet giving away 50% of the profit on every test sent out the reference lab, keeping the routine tests in-house provides faster results, direct interaction with the client and a platform for educated decisions to be made on the spot that can drive better clinical care and potentially drive an additional revenue stream. All of the constituencies win.”