5 Telecom Stock Set To Beat Estimates This Earnings Season

The U.S. telecommunications industry had a disappointing 2017. Cut-throat pricing competition resulting in lower ARPU (average revenue per user) and margins, massive investment for upcoming 5G wireless network and fiber optic buildout resulting in low free cash flow and intense competitive pressure shifted investor’s focus toward other growth-oriented industries in an overall bull market in 2017.

However, the situation has been showing signs of easing from fourth-quarter 2017 as most of the major telecommunications stocks have done well since then. The momentum is likely to continue in 2018 albeit at a slow pace. Several positives have appeared for this industry in the last quarter of 2017.

Major Positives

President Donald Trump’s proposed policy changes have made the overall economic outlook fairly bullish. The two pro-growth agendas of Trump, namely, a significant cut in corporate tax and deregulation are major catalysts to the U.S. economy.  Trump has stated that he wants to do away with nearly 75% of all governmental regulations during his term as the President. We believe that the telecom industry will be one of the major beneficiaries of this policy change.

On Dec 14, 2017, in a landmark decision, the U.S. telecom regulator Federal Communications Commission (FCC) repealed the Net Neutrality laws that it had imposed under the Obama regime. There is little doubt that the ISP industry will be the major beneficiary after FCC dismantling Net Neutrality. The current FCC's less-restrictive regulatory attitude may also pave the way for new merger and acquisition deals between ISPs and online digital media companies.

The proposal to reduce corporate tax rate from 35% to 20% faced by telecom carriers would be immediately accretive to cash flow. Trump’s tax proposal will result in a huge windfall for telecom operators. The carriers can utilize this money for 5G network R&D and its deployment.  

The telecom industry is highly capital-intensive in nature. Therefore, the immediate expensing of investment in all tangible, intangible and real property (other than land) would significantly benefit telecom carriers. This would encourage telecom operators to increase investment for capital expenditure. Major proposals such as a pledge to spend $1 trillion in infrastructure projects over a period of 10 years coupled with the above-mentioned policy changes are likely to spur higher consumer spending.

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