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Telecom Talk: 4 Stocks For Smartphones And 5G

The major telecommunications carriers may not be as sexy the latest biotech or crytpo play, but with low valuations, recession resistant businesses and high barriers to entry, many long-term investors find these stocks appealing. Adding some sizzle is the continued growth in smartphone and data usage and the shift to 5G networks. Here 4 leading experts and contributors to MoneyShow.com offer an overview of the best bets in the telecom space.

Blue chip companies that stumbled badly — and are starting to recover — are the best values available to investors today. Nokia (NOK) is a new addition to our list of fallen angels. It has great potential that I think you should consider.

Many investors may remember Nokia for the popular cellphones they produced many years ago. The Finnish company led the industry with innovative designs, reliability, and ease of use.

Nokia made the transition from analog phones to digital phones with ease. However, the company failed to adequately take the next big step to smart phones with cameras, internet browsers, and entertainment capabilities. As a result, Nokia’s products all but disappeared from the cellphone market.

Nokia then followed a path that many companies take when they find themselves — and their products — out of date. The company decided to reinvent itself. Old managers and weak operations were eliminated.

New blood was brought in to revitalize the company and led it in new directions. The new management promptly sold Nokia’s cellphone business and expanded into the much broader — and more profitable — field of telecom equipment.

Nokia is now a competitive player in the telecom equipment industry. After its early struggles with 5G networks, the company appears to be on track for 2021 net sales to reach $25.6 million, with profit margins of 7% to 10%. Return on invested capital should come in between 10% and 15%. Last year, net sales were the same — but the profit margin was only 4%.

I think Nokia is another recovering fallen angel that you should consider for your long-term accounts. We are early birds with the company. But that’s the right place to be if — as I believe — Nokia is starting to turn itself around.

American wireless network operator T-Mobile US Inc. (TMUS), the second-largest carrier in the U.S., boasts the first and largest nationwide 5G network, said to reach more cities and towns in America than anyone else. Headquartered in Bellevue, WA, it provides services through its subsidiaries and operates its flagship brands, T-Mobile, Metro by T-Mobile and Sprint


What’s the big deal with 5G? It’s superfast (can operate up to 100 times faster than 4G networks), low-latency and will open doors for a new generation of apps that include virtual reality and will likely allow for more automated factories, thus potentially speeding up economic activity.

T-Mobile’s Extended Range 5G covers 305 million people and 1.7 million square miles — more geography than Verizon

(VZ) and AT&T

(T) combined — and its superfast Ultra Capacity 5G that covers 165 million people is expected to reach 200 million nationwide by the end of this year.

The company leads in 5G partly because of its acquisition of Sprint last year (and other investments). About one-third of Sprint customers have already been moved to the T-Mobile network.

T-Mobile is said to have a huge 2-year lead in 5G deployment over competitors. It also challenged Verizon and AT&T by branding itself as the “un-carrier,” to eliminate long-term contracts, data coverage fees, subsidized phones, and other consumer annoyances, as well as offer free international roaming, data-free streaming, and unlimited text, talk, and data plans.

T-Mobile will also soon start a wireless home-internet service that could steal business from cable companies.

T-Mobile also took home the gold — the #1 ranking — in the J.D. Power 2021 U.S. Wireless Customer Care Mobile Network Operator Performance study. It was the 22nd time the company got 1st place.

Q2 had record financial results, with total revenues of $20 billion (up 13% year-over-year, boosted by its merger with Sprint), services revenues of $14.5 billion (up 10% year-over-year), and adjusted earnings that increased by 765% to 78 cents per share from a year earlier.

The company said it added 627,000 postpaid phone subscribers vs. 253,000 a year earlier. Analysts had estimated 595,000 postpaid phone subscriber additions. T-Mobile had been the industry leader in postpaid phone subscriber additions for several years standing. T-Mobile repurchased reduced shares outstanding by 10.387% in the last 12 months.

Verizon Communications

(VZ) was the first to prove the potential of 4G wireless. So when rival T-Mobile US (TMUS) appeared to take the lead in rolling out 5G, many have assumed the company has passed the torch of industry leadership.

That belief shows up in Verizon’s heavily discounted multiple of 10.4 times expected next 12 months earnings versus T-Mobile’s 54.3 times. But there are clear signs the balance of power is shifting, as Verizon’s longer-to-deploy version of 5G technology based on millimeter wave begins to reach critical mass.

The tipping point: Verizon’s widely panned but highly successful bids for C-band spectrum earlier this year. Coupled with optimizing the fiber broadband Fios network, the added capability has again landed its network atop quality ratings from JPower and RootMetrics.

That’s now translating into 5G uptake. Management estimates 20 percent of its wireless customers already use 5G devices that are mostly C-band capable. And the company is seeing accelerating customer growth (1.7 million gross adds in Q2), while cutting churn to record lows and moving more users to unlimited data plans (69 percent of users at end Q2).

The upshot was acceleration in Q2 wireless revenue growth for America’s largest provider to 5.4 percent, well above management’s previous guidance. And growth also extends to the long-shrinking business-to-business division (up 3.7 percent), with the company now taking share from rivals.

These favorable trends induced management to raise 2021 full-year revenue growth guidance by nearly a percentage point and the mid-point of its earnings forecast range to $5.30 from $5.10 per share.

That’s the biggest upward revision in some time. And odds are there are more big boosts in store, as Verizon expands 5G coverage some estimate currently reaches just 51 percent of the country.

Closing the sale of the media division for $5 billion is a potential upside catalyst for later this year. So is winning regulators’ approval of the proposed purchase of America Movil’s (AMX) US prepaid unit TracFone.

But the bottom line is Verizon is slowly but surely proving its business case. And the more the company shows itself as the “Tortoise” to T-Mobile’s “Hare” in the 5G race, the bigger returns will grow for patient investors. Buy up to $65.

AT&T (T) has a competitive advantage with its entrenched position and immense scale; it is very difficult for a new telecom company to build a network with the scale to compete.

During the “Great Recession from 2007 to 2010, the company posted earnings of $2.76, $2.16, $2.12 and $2.29. The company did not eclipse its pre-recession high on an earnings basis until 2016, but the dividend did continue to grow through the entire period We expect AT&T to remain highly profitable during challenging times.

In the 2021 second quarter, AT&T generated $44.0 billion in revenue, up 7.6% from Q2 2020. Communications segment revenue grew 6%, as AT&T generated postpaid net additions of nearly 3 million for the quarter.

WarnerMedia revenue increased 31% year-over-year. Adjusted earnings-per-share (EPS) equaled $0.89 compared to $0.83 in the year ago quarter, for 7% year-over-year growth. AT&T ended the quarter with a net debt-to-EBITDA ratio of 3.15x.

AT&T has announced it will spin off multiple assets into a separate company called ‘New DIRECTV’ that will own and operate DIRECTV, AT&T TV, and U-verse video. AT&T will own 70% of the common shares. In May, AT&T announced an agreement to combine WarnerMedia with Discovery (DISCA

) to create a new global entertainment company, Warner Bros. Discovery.

We believe AT&T has new growth avenues as a result of its asset sales and mergers. By separating its media businesses, AT&T intends to refocus on its core competencies.

Following the close of the Discovery transaction, the remaining AT&T business expects low single-digit revenue growth, mid-single-digit adjusted EPS growth, and a net-debt-to-EBITDA ratio of 2.6x. In addition, the company is well-positioned to take advantage of the 5G rollout.

We expect AT&T to generate adjusted earnings-per-share of $3.20 in 2021. Based on this, shares are presently trading at a price-to-earnings ratio (P/E) of 8.4. We view AT&T as undervalued, with a fair value P/E estimate of 11 times earnings, which means valuation expansion could add 5.2% per year to returns. Including the 7.6% dividend yield and 3% expected EPS growth, this implies a 14% annual total return.

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