The Zacks Communication – Components industry appears to be mired in supply-chain disruptions due to the latent Sino-U.S. trade hostilities and the cascading effect of the coronavirus that have affected the delivery schedule of most companies. In addition, significant capital expenditures and margin erosion due to price wars have dented the industry’s profitability.
Nevertheless, Corning Incorporated (GLW), Altice USA, Inc. (ATUS) and Knowles Corporation (KN) are likely to benefit in the long run due to higher demand for scalable infrastructure for seamless connectivity amid wide proliferation of IoT driven by faster pace of 5G deployment.
The Zacks Communication – Components industry primarily comprises companies that provide diverse telecom products and services for the development of scalable network architecture, demand-driven video solutions and broadband access equipment. These include various building blocks such as small cells, routers and antennas that are incorporated into equipment and facilities and subsequently utilized by service providers to build networks for end users. Their product portfolio encompasses optical and copper connectivity products, hybrid fiber-coaxial equipment, edge routers, metro Wi-Fi, storage and distribution equipment for cable TV operators, cable and DSL modems, EMTAs (Embedded Multimedia Terminal Adapter), gateways, and set-top boxes.
Some firms within the industry also offer cloud networking and virtualization solutions for data centers and cloud-computing environments along with end-to-end network visibility and analytics that help build, test, certify, maintain and optimize complex physical and virtual networks. These companies employ multiple silicon architecture to offer highly modular networking solutions. Some industry participants offer innovative audio products, including analog and digital microphones and balanced armature speakers, audio processors, and software and algorithms that are used in applications that serve the mobile, ear and IoT markets. A few industry participants even provide glass substrates that are commonly found in LCD TVs, notebooks and flat-panel desktop PC monitors, ceramic substrates for mobile, emission control systems, filter plates for genomics, centrifuge tubes and laboratory filtration products. In addition, some firms offer a digital platform for hands-free communication via secure text messaging, alert and alarm management that effectively solves healthcare communication and workflow challenges. A couple of leading stocks within the industry are Arista Networks, Inc. (ANET) and Corning Incorporated.
What’s Shaping the Future of Communication Components Industry
Higher Demand for Scalable Infrastructure: Telecom service providers are increasingly leaning toward fiber optic cable in order to meet the burgeoning demand for cloud-based business data and video-streaming services by individuals. Moreover, the fiber-optic cable network is vital for backhaul and last mile local loop, which are required by wireless service providers for the deployment of the 5G network. Fiber networks are also essential for the growing deployment of small cells that bring the network closer to the user and supplement macro networks to provide extensive coverage. Higher utilization of advanced routers to deliver data packets from one network to another is gaining prominence, while state-of-the-art antenna systems remain essential architectural components for seamless connectivity. The telecom firms are aiding their customers to move away from an economy-of-scale network operating model to demand-driven operations by offering easy programmability and flexible automation. The industry is well poised to meet these evolving trends, given its technology prowess, product depth and wide applications. An increased pace of 5G deployment and greater demand for seamless data connectivity due to higher broadband utilization owing to various lockdown restrictions amid the coronavirus pandemic are likely to propel the industry’s growth.
Proliferation of Cloud Networking: The industry participants are transforming the entertainment experience through a holistic approach to content delivery in order to help providers anticipate demand for more personalized, relevant and mobile experiences. Voice-powered interactions are fast emerging as a critical and necessary feature, as consumers tend to engage with technology through natural, spoken commands across the mobile, ear and IoT platforms. This has led to a wide array of products ranging from mobile phones to headsets, and from smart speakers to household appliances. Moreover, the firms offer a variety of pathways for delivering services through a combination of network-based video transcoding, packaging, storage and compression technologies required to deliver new IP video formats and home gateways to connected devices inside and outside the home. Some firms are also benefiting from the expanding cloud networking market, primarily driven by strong demand for scalable infrastructure, which has become necessary for new applications and services. Apart from delivering high capacity and availability, cloud networking promises predictable performance along with programmability that enables integration with third-party applications for network, management, automation, orchestration and network services.
Exponential Rise in Bandwidth: Consumer demand for faster Internet speeds with more capacity continues to grow at an escalating rate, primarily driven by increasing consumption of videos. The wide proliferation of cloud networking solutions is further resulting in increased storage and computing on a virtual plane. As both consumers and enterprises are using the network, there is tremendous demand for quality networking equipment. Moreover, the demand for faster data transfer is fueling growth of optical networks. The industry participants provide the technology to enable customers to manage this exponential bandwidth-development cost effectively through steady investments in state-of-the-art technologies. These include DOCSIS (Data Over Cable Service Interface Specification), DSL (Digital Subscriber Line) and Next Generation PON (Passive Optical Network) platforms that enable service providers to deliver the highest bandwidth to subscribers across any physical connection. Further, some firms are benefiting from innovation in the glass substrate market, enabling panel manufacturers to do away with costs that are usually necessary for making slimmer, lighter and more power-efficient consumer devices.
Zacks Industry Rank Indicates Encouraging Prospects
The Zacks Communication – Components industry is housed within the broader Zacks Computer and Technology sector. It carries a Zacks Industry Rank #109, which places it among the top 43% of more than 250 Zacks industries.
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates encouraging 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. The industry’s positioning in the top 50% of the Zacks-ranked industries is a result of positive earnings outlook for the constituent companies in aggregate.
Before we present a few communication component 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.
Industry Lags Sector and S&P 500
The Zacks Communication – Infrastructure industry has lagged the broader Zacks Computer and Technology sector as well as the S&P 500 composite over the past year, largely due to near-term challenges.
The industry has declined 3.2% over this period against the S&P 500 and sector’s rise of 6.8% and 27%, respectively.
One Year Price Performance
Industry’s Current Valuation
On the basis of the trailing 12-month price-to-book (P/B) ratio, the industry is currently trading at 3.43X compared with the S&P 500’s 5.42X. It is also below the sector’s trailing-12-month P/B ratio of 7.5X.
Over the past five years, the industry has traded as high as 3.70X, as low as 1.12X and at the median of 2.52X, as the chart below shows.
Trailing 12-Month price-to-book (P/B) Ratio
3 Communication Components Stocks to Keep a Close Eye on
Corning Incorporated: New York-based Corning started out as a glass business that was reincorporated in 1936. The company has since developed glass technologies to produce advanced glass substrates that are used in a large number of applications across multiple markets. The stock has gained 8% in the past year against the industry’s decline of 3.2%. The Zacks Consensus Estimate for current-year earnings has been revised 13.3% upward over the past 90 days. The company holds a leadership position in each of the markets addressed by its five Market-Access Platforms and operates on a strong financial foundation that positions it for long-term growth. Corning is benefiting from improving demand and commercialization of its innovations. The stock sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Price and Consensus: GLW
Altice USA, Inc.: Headquartered in Long Island City, NY, Altice is one of the largest broadband communications and video services providers in the United States. This Zacks Rank #2 (Buy) stock has gained 10.6% in the past six months. The Zacks Consensus Estimate for current-year earnings has been revised 6% upward over the past 90 days. Altice is on track with its five-year plan to build a FTTH (fiber-to-the-home) network and deploy its new home communications hub. This network will allow it to satisfy demand for increasing speeds and support evolving technologies, such as the expected transition of mobile networks to 5G and capitalize on associated revenue-growth opportunities. Additionally, the company is building a next-generation fiber network capable of delivering broadband speeds of 10 Gbps, reflecting continued investments in technology and innovation for its customers.
Price and Consensus: ATUS
Knowles Corporation: Founded in 1946 and headquartered in Itasca, IL, Knowles is a premier provider of advanced micro-acoustic, audio processing and precision device solutions, serving the mobile consumer electronics, communications, medical, defense, automotive and industrial markets. This Zacks Rank #2 stock has gained 1.8% in the past six months. The Zacks Consensus Estimate for current-year earnings has been revised 14.3% upward over the past 90 days. Proprietary manufacturing techniques, rigorous testing and global scale of operations have facilitated Knowles to fine tune its business with the evolving customer demands and invest in high-value solutions to diversify its revenues and increase exposure to high-growth markets. The transformation from an acoustic component supplier to an audio solutions provider has enabled the company to migrate to higher-value solutions and increase content per device. This, in turn, has empowered the company to capitalize on the positive macro trends in audio and edge processing solutions.
Price and Consensus: KN
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