I get it. Telecom stocks are tough to buy right now. And they’ve been that way for some time.
When it comes to telecom stocks, there are just so many headwinds. Netflix (NASDAQ:NFLX) continues to change the media consumption landscape, and not for the better of telecom companies. Everyone is cutting the cord, and the pace of cord-cutting isn’t slowing down. If anything, it is accelerating. Meanwhile, adverse wireless pricing trends have been a problem for several years, voice-related businesses are becoming a relic of the past, and competition from technology companies on all fronts is only getting stiffer.
But telecom stocks are priced for all this bad stuff. By and large, these are stocks that haven’t gone anywhere over the past five years while the rest of the market has rallied more than 70%. As a result, telecom stocks now feature single-digit forward earnings multiples, 4%-plus dividend yields and 5%-plus free cash flow yields.
Those are attractive valuation fundamentals. The only thing you need at this point that would make telecom stocks a buy is some semblance of growth.
We might get that growth over the next few years. Telecom giants are making sizable pivots into streaming, which should help offset wireline weakness. Meanwhile, the wireless business could get a major boost over the next few years thanks to 5G roll-out.
As such, now may be the time to buy beaten up telecom stocks. With that in mind, here’s a list of three telecom stocks you should consider for a multi-year rebound.
Telecom Stocks to Consider: AT&T (T)
Mr. Market has been bearish on AT&T (NYSE:T) ever since the company was cleared to acquire Time Warner (NYSE:TWX) a few weeks ago. The general consensus appears to be that AT&T is inheriting a ton of debt to acquire assets that don’t scream hyper-growth, and with interest rates rising, the only obvious results of this acquisition are super-charged, debt-related expenses for AT&T.
But I take the contrarian view on this acquisition. Time Warner gives AT&T the necessary assets to save its struggling video business.
The logic here is pretty simple. Cord-cutting isn’t going to stop any time soon. Thus, the only way AT&T saves its video business is by pivoting into streaming. In the streaming world, the only way you succeed at scale is by having a robust content portfolio that is both better than and different from other streaming platform’s content. Therefore, the only way AT&T succeeds in streaming is by acquiring/developing a robust original content portfolio.
Time Warner gives AT&T the assets to do that. Time Warner is the company behind blockbuster hits like Wonder Woman, Dunkirk and It. The company also owns CNN, TNT, TBS and Cartoon Network, in addition to HBO and Cinemax. Packaging all of those assets into a streaming platform with both on-demand and live video streaming options seems like a compelling value prop.
As such, I expect AT&T’s pivot into streaming over the next several years to be successful. Plus, the company already operates DirecTV Now, which has been a bright spot for AT&T’s otherwise struggling video business.
At present levels, AT&T stock just isn’t priced for any upside from streaming. The stock trades at 9-times forward earnings. The dividend yield is at a five-year high of 6.3%. And the free cash flow yield is right around 9.5%, also near five-year highs.
In the big picture, then, the risk-reward asymmetry on AT&T stock seems favorable heading into the next several years, which could be marked by out-sized growth in the streaming markets.
Telecom Stocks to Consider: Verizon (VZ)
There are two big reasons to consider Verizon (NYSE:VZ) as a potential telecom investment over the next few years: forthcoming 5G roll-out, and discounted stock price.
The growth narrative at Verizon is all about 5G. Mass scale 5G roll-out is expected to commence in the back-half of 2018, and really gain momentum in 2019 and after. This roll-out is expected to provide a huge boost to the entire wireless service industry because it is the industry’s “next big thing.”
But there is more to this growth narrative than just a technology revolution in the wireless service industry. Forthcoming 5G roll-out will change the competitive dynamics in the wireless service industry, and such changes should be hugely beneficial for Verizon.
Namely, as Verizon’s CEO astutely points out, 5G competition will be on capability, not price. That marks a huge change from the competitive dynamics, which have ruled the wireless carrier industry over the past several years. Relative complacency in coverage technology has allowed all wireless service providers to be on essentially the same playing field. Thus, there was no competition on capability. It was all competition on price, and that created harmful pricing wars between wireless service providers, which ultimately eroded margins.
But 5G marks a shift away from that. When 5G rolls out in 2018-19 and after, not every wireless service provider will have the same 5G capability. Thus, the playing field will once again become uneven, and competition will shift from price to capability.
Verizon, who has long been the most capable wireless service provider and the one with the most resources, will likely be the king of 5G capability. As such, they will be on a higher 5G playing field than peers, which will both attract more customers and allow the company to escape price wars. The net result will be higher revenues and higher margins.
At 10-times forward earnings with a near-5% dividend yield, Verizon stock isn’t priced for this reality to materialize over the next few years. Consequently, Verizon looks like a strong telecom investment for the next few years.
Telecom Stocks to Consider: China Mobile (CHL)
The whole Chinese technology landscape mirrors the U.S. technology landscape. For each technology giant in the U.S., there is a Chinese counterpart across the Pacific Ocean. Alibaba (NYSE:BABA) is the Chinese Amazon (NASDAQ:AMZN), Tencent (OTCMKTS:TCEHY) is the Chinese Facebook (NASDAQ:FB), so on and so forth.
One of the more unheralded Chinese tech counterparts is China Mobile (NYSE:CHL), which is essentially the Chinese Verizon.
And just like Verizon, China Mobile isn’t exactly a big growth company. That may seem surprising, considering China’s booming consumer technology market, but China Mobile is already so big (nearly 900 million total mobile customers) and the Chinese smartphone market is already largely maxed out (China’s smartphone market shrunk for the first time in 9 years in 2017) that CHL is a low-growth company.
But you don’t buy CHL stock for growth. You buy CHL stock here and now because the company is huge, has visible staying power for the next several years, and the stock is dirt cheap. Not only does CHL stock feature a 4.6% dividend yield, but its forward earnings multiple is just 6.5, a 35% discount to Verizon’s forward multiple.
In other words, despite CHL being China’s Verizon, the stock trades at a 35% discount to Verizon. That is a big discrepancy, which implies that any positive news from CHL could cause a big jump in the stock price.
Consequently, the risk-reward asymmetry on CHL stock over the next few years looks compelling.
As of this writing, Luke Lango was long T, VZ, BABA, AMZN, FB and CHL.
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