Where most members of the telecommunications sector will soon cease to exist under the S&P and MSCI Global Industry Classification System, they will be substituted by the new communications services sector, where many telecom stocks have still performed poorly.
That may be set to change, according to Oppenheimer’s Timothy Horan. He has explained that the second half of the year will be more positive than the first for the industry, helping by improving wireless trends.
Horan believes that the communication sector has already bottomed relative to the market and that investors can expect to see stronger performance in the back half of the year, helped by largely “benign” competition on the wireless front and better average revenue per user. At this point, carriers have shifted away from the damaging price-cutting stage and are more focused on building in features aimed at squeezing higher sales from customers, he says.
Premium unlimited plans should also boost more exciting per-user revenue, in addition to ordinary price increases. Horan is anticipating that companies will continue to bundle streaming TV and video services into unlimited data plans, saying wireline broadband service is also a likely driver of sales. “The convergence of wireline and wireless is happening longer term and will lead to major consolidation,” he wrote Wednesday.
Horan’s top large-cap picks are AT&T(T) and T-Mobile US (TMUS). He notes AT&T’s dividend yield is now at 6% versus 4% for Verizon Communications (VZ), the “largest spread ever.” For T-Mobile, he expects increased market share gains and margin improvement, saying the merger with Sprint (S) will be transformational, creating a company with half the value of Verizon but nearly the same number of customers.
AT&T was down 0.1% to $33.35 in recent trading, while T-Mobile was up 0.2% to $68.50.