The Zacks Communication - Infrastructure industry appears to be plagued by escalating capital expenditures for infrastructure upgrades, unpredictable raw material prices owing to Middle East tensions, supply-chain disruptions albeit at a decreasing rate and high customer inventory levels. However, the industry should benefit in the long run from an increasing user propensity to stay abreast of the latest digital innovations.

Against this backdrop, CommScope Holding Company, Inc. COMM and Anterix Inc. ATEX 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

The Zacks Communication - Infrastructure industry players provide various infrastructure solutions for core, access and edge layers of communication networks. Leveraging proprietary modeling and simulation techniques to optimize networks, the 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 portfolio encompasses 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 Communication - Infrastructure Industry?

Soaring Equipment Prices: High raw material prices due to inflation, economic sanctions against the Putin regime and intensifying war-mongering conditions 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 affected profitability due to inflated equipment prices.

Eroding Demand: 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 U.S.-China 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.

Margin Woes Persist: Video and other bandwidth-intensive applications have witnessed exponential growth owing to the wide proliferation of smartphones and increased deployment of the superfast 5G technology. This has forced the 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 capable of meeting 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.

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. The 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.

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 #217, which places it in the bottom 14% 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 bleak 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.

Industry Lags 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 a mere 1.8% over this period compared with the S&P 500 and the sector’s growth of 31% and 35.8%, respectively.

One-Year Price Performance

Industry's Current Valuation

On the basis of the trailing 12-month enterprise value-to-EBITDA (EV/EBITDA), which is the most appropriate multiple for valuing telecom stocks, the industry is currently trading at 2.87X compared with the S&P 500’s tally of 18.99X. It is also trading below the sector’s trailing 12-month EV/EBITDA of 18.17X.

Over the past five years, the industry has traded as high as 9.82X, as low as 2.09X and at the median of 7.26X, as the chart below shows.

Trailing 12-Month enterprise value-to-EBITDA (EV/EBITDA) Ratio

2 Communication - Infrastructure Stocks to Watch

CommScope: Headquartered in Hickory, NC, CommScope is a premier provider of infrastructure solutions, including wireless and fiber optic solutions, for the core, access and edge layers of communication networks. Since its inception in 1976, the company has created a niche for itself, helping customers scale network capacity, delivering better network response time and performance, and simplifying technology migration. CommScope is focused on sound technology, a highly efficient supply chain and a commitment to continuous improvement. This will potentially make the company a preferred partner for all telecommunications businesses as the entire industry moves toward 5G. It has a long-term earnings growth expectation of 24.9%. The stock is up 115.8% over the past year. CommScope carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Price and Consensus: COMM

Anterix: Headquartered in Woodland Park, NJ, Anterix is a premier 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. Anterix expects to monetize its spectrum assets to generate long-term value. Anterix carries a Zacks Rank #3 (Hold).

Price and Consensus: ATEX

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report

CommScope Holding Company, Inc. (COMM) : Free Stock Analysis Report

Anterix Inc. (ATEX) : Free Stock Analysis Report

To read this article on Zacks.com click here.

Zacks Investment Research