Image: Bigstock

The Zacks Communication - Infrastructure industry appears to be swamped with challenges, such as burgeoning capital expenditures for infrastructure upgrades, unpredictable raw material prices due to Middle East geopolitical tensions, supply-chain disruptions amid the prolonged Russia-Ukraine war, and high customer inventory levels. However, the industry is expected to benefit in the long run from an increasing user propensity to stay abreast of the latest digital innovations.

Against this backdrop, IHS Holding Limited (IHS - Free Report) and Anterix Inc. (ATEX - Free Report) are likely to gain from solid demand for scalable infrastructure for seamless connectivity with wide proliferation of IoT, transition to cloud and next-gen technologies, and accelerated 5G rollout.

Industry Description

 Industry players provide various infrastructure solutions for core, access, and edge layers of communication networks. Leveraging proprietary modeling and simulation techniques to optimize networks, these firms offer high-speed network access solutions across Internet protocol, asynchronous transfer mode, and time-division multiplexed architecture in both wireline and wireless network applications.

Their product portfolios often encompass optical fiber and twisted-pair structured cable solutions, infrastructure management hardware and software, network racks and cabinets, fiber-to-home equipment like hardened connector systems, wireless network backhaul planning and optimization products, couplers and splitters, indoor, small cell and distributed wireless antenna systems, and hardened optical terminating enclosures.

What's Shaping the Future of the Industry?

Diminishing Return on Investment (ROI): Video and other bandwidth-intensive applications have witnessed exponential growth owing to the wide proliferation of smartphones and increased deployment of the super-fast 5G technology. This has forced industry participants to invest considerably in LTE, broadband and fiber to provide additional capacity and ramp up the Internet and wireless networks.

These companies are rapidly transforming themselves from legacy copper-based telecommunications firms to technology powerhouses with capabilities to meet the growing demand for flexible data, video, voice, and IP solutions. Although these infrastructure investments are likely to be beneficial in the long run, short-term profitability has largely been compromised, leading to lower ROI.

Inflated Raw Material Prices: High raw material prices due to inflation, economic sanctions against the Putin regime, and intensifying tensions in the Middle East have affected the operation schedules of various firms. Extended lead times for basic components are also likely to hurt the delivery schedule and escalate production costs. The demand-supply imbalance has crippled operations and largely affected profitability due to inflated equipment prices.

Demand Erosion: Efforts to offset substantial capital expenditure for upgrading network infrastructure by raising fees have reduced demand, as customers tend to switch to lower-priced alternatives. In addition, latent Sino-U.S. tensions relating to trade restrictions imposed on the sale of communication equipment to firms based in the communist country have dented the industry’s credibility, leading to a loss of business. The industry is battling hard-to-mitigate operating risks stemming from volatility in demand, an unpredictable business environment, and challenging geopolitical scenarios.

Network Convergence: With operators moving toward converged or multi-use network structures, combining voice, video, and data communications into a single network, the industry is increasingly developing solutions to support wireline and wireless network convergence. These investments are likely to help minimize service delivery costs to adequately support broadband competition and expand rural coverage and wireless densification in the long run.

Industry players have enabled enterprises to rapidly scale communications functionalities to a vast range of applications and devices with easy-to-use software application programming interfaces. The firms support high user volumes without affecting deliverability and cost-effectively eliminate performance degradation.

The Zacks Industry Rank Indicates Bearish Prospects

The Zacks Communication - Infrastructure industry is housed within the broader Zacks Computer and Technology sector. It carries a Zacks Industry Rank of #183, which places it in the bottom 26% of more than 250 Zacks industries.

The group’s Zacks Industry Rank, which is the average of the Zacks Rank of all the member stocks, indicates grim prospects. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1. 

Before we present a couple of communication infrastructure stocks that are well-positioned to outperform the market based on a strong earnings outlook, let’s take a look at the industry’s recent stock market performance and valuation picture.

The Industry Lags the S&P 500 & Sector

The Zacks Communication - Infrastructure industry has lagged the broader Zacks Computer and Technology sector and the S&P 500 composite over the past year. The industry has jumped 1.7% over this period compared with the S&P 500 and the sector’s growth of 26.2% and 35.8%, respectively.

One-Year Price Performance

Image Source: Zacks Investment Research

The Industry's Valuation

On the basis of the trailing 12-month enterprise value-to-EBITDA (EV/EBITDA), which is the most appropriate multiple for valuing stocks in the space, the industry is trading at 2.86X compared with the S&P 500’s tally of 18.36X. It is also trading below the sector’s trailing 12-month EV/EBITDA of 18.65X.

Over the past five years, the industry has traded as high as 9.82X, as low as 2.09X, and with the median of 6.98X, as the chart below shows.

Trailing 12-Month Enterprise Value-to-EBITDA (EV/EBITDA) Ratio

Image Source: Zacks Investment Research

2 Communication - Infrastructure Stocks to Watch

Presented below are 2 stocks in the space to keep an eye on.

IHS Holding

Based in London, the United Kingdom, IHS Holding is one of the largest independent owners, operators and developers of shared communications infrastructure in the world by tower count. It has more than 40,000 towers across 11 markets — Brazil, Cameroon, Colombia, Egypt, Kuwait, Nigeria, Peru, Rwanda, South Africa, and Zambia.

The company’s open-access, shared infrastructure approach ensures a robust and scalable fiber network that multiple operators can utilize. The connectivity of towers enables the extension of fiber infrastructure into key metropolitan areas, facilitating the delivery of digital services to residences, businesses, and public entities in collaboration with its clients. The stock has a VGM Score of A. IHS Holding also carries a Zacks Rank #2 (Buy) rating.

Price and Consensus: IHS Holding

Image Source: Zacks Investment Research

Anterix

Headquartered in Woodland Park, NJ, Anterix is a wireless communications firm. It reportedly holds the largest licensed spectrum in the 900 MHz band, with coverage throughout the United States, Alaska, Hawaii, and Puerto Rico. The company expects to monetize its spectrum assets to generate long-term value. Anterix carries a Zacks Rank #3 (Hold) rating.

Price and Consensus: Anterix

Image Source: Zacks Investment Research 

More By This Author: