I received an early signal that wireless-telecom services might be a winning industry in 2003 when it showed up as one of the 10 industries in my January Barometer for Industries portfolio. (By the way, the portfolio is up 40.5% year-to-date through Oct. 3, vs. the Standard & Poor's 500-stock index' gain of 16.4% during the same period.) And in June, I wrote a story about this industry after it became a member of the Industry Momentum portfolio -- the roster of industries with top S&P Relative Strength rankings (see BW Online, 6/17/03, "Cells to Buy"). Still, I thought it would be a good idea to revisit with Kenneth Leon, S&P's wireless telecommunications services analyst, to look at the wireless group's current prospects.
Leon's investment outlook for the wireless-telecom subindustry is positive. In the next 6 to 12 months, he believes the group will remain attractive as growing EBITDA (earnings before interest, taxes, depreciation, and amortization) and positive earnings on an as-reported basis support higher p-e multiples, bolstered by some key factors.
QUALITY GROWTH. First, Leon believes the pricing environment has become more stable, although select wireless carriers are offering more "anytime" minutes and monthly rollover minutes in their rate plans. Yet, the group is showing quality growth with higher average revenue per user (ARPU) from enhanced data services and lower customer turnover.
Second, the industry is driving higher EBITDA margins with managed marketing costs and lower bad debt expense. Finally, carriers are improving their balance sheets and increasing free cash flow with restrained capital spending.
In the September quarter, Leon believes Verizon Wireless -- a joint venture of Verizon (VZ) and Vodafone (VOD) -- will take 25% to 30% of the industry's total new net subscriber additions. Nextel Communications (NXTL) may continue its leadership with the best EBITDA margins, while AT&T Wireless (AWE) and U.S. Cellular (USM) should show margin improvement from a prior low ranking.
PRESSURE POINTS. Cingular, a joint venture of BellSouth (BLS) and SBC Communications (SBC), has recently been aggressive with an unlimited "24/7" calling plan for new subscribers as well as a rollover feature of unused minutes from month to month.
Leon cites some short-term risks that may put pressure on stocks in the group. On Nov. 24, the Federal Communications Commission decision on wireless number portability will go into effect, which may increase competition, customer turnover, and market-share changes (see BW Online, 8/1/03, "As Number Portability Nears"). Substitution to wireless from wireline services with the same phone number will also be offered by Verizon and other wireline carriers starting Nov. 24.
Also, notes Leon, the FCC has issued a consumer advisory on wireless "911" emergency calls in light of the Aug. 14 power blackout. The FCC has called for state regulators to accelerate the conversion of public-safety call centers to receive E911 calls. Today, wireless consumers pay E911 surcharges that go to state and local governments.
HIGHEST RATING. Leon notes one other development: Verizon Wireless has launched push-to-talk service, which may put pressure on Nextel's unique "walkie-talkie" offering. Nextel recently filed a lawsuit against Verizon alleging false advertising claims.
Leon's top selection in the group remains Nextel (see BW Online, 10/3/03, "A Front-Runner in Wireless"). He has assigned S&P's highest investment recommendation, 5 STARS (buy), to the stock. He also has 4 STARS (accumulate) recommendations on AT&T Wireless; Nextel Partners (NXTP), which is 32%-owned by Nextel Communications; and U.S. Cellular (USM).
Industry Momentum List Update
For regular readers of the Sector Watch column, here's this week's list of the 11 industries in the S&P Super 1500 with Relative Strength Rankings of "5" (price performances in the past 12 months that were among the top 10% of the industries in the S&P 1500) as of October 3, 2003.
S&P STARS* Rank
Computer Storage & Peripherals/Info. Tech.
Storage Technology (STK)
Consumer Electronics/Consumer Discretionary
Harman International (HAR)
Diversified Metals & Mining/Materials
Phelps Dodge (PD)
D.R. Horton (DHI)
Internet Retail/Info. Tech.
Internet Software & Services/Info. Tech.
IT Consulting & Other Services/Info. Tech.
Office Electronics/Info. Tech.
Semiconductor Equipment/Info. Tech.
Wireless Telecom Svcs./Telecom Svcs.
* S&P's stock appreciation ranking system for the coming 6- to 12-month period: 5 STARS (buy), 4 STARS (accumulate), 3 STARS (hold), 2 STARS (avoid), 1 STAR (sell).