3 Top Telecom Stocks

06/14/2011 12:00 pm EST


Roger Conrad

Chief Analyst/Managing Partner, Capitalist Times

Bigger is still better when it comes to buying into the broadband telecom revolution, writes Roger Conrad of Utility Forecaster.

America’s copper-wire telephone network has been the core of its communications system for more than a century. Over the past decade, however, the country has increasingly opted out for a higher-capacity, faster broadband network.

Today, more than a quarter of US households have no traditional phone lines. Instead, they utilize a combination of wireless phones and broadband connections, including services offered by cable-television companies and non-facilities-based retailers such as Skype and Vonage (VG). And their numbers are swelling daily.

At the same time, however, Americans are buying more communications services than ever before. The primary driver of this connectivity explosion is the smartphone, whose myriad applications have suddenly become essential services.

I noted back in 2009 that revenue from “data” services—like texting, entertainment downloads, social networking, and information retrieval—was still growing rapidly despite the recession, and I forecast even better things when the economy stabilized.

The two years since have, if anything, proved that forecast conservative. In fact, at their current growth rate, revenue from such services will roughly triple to $200 billion by 2017.

Ironically, both shrinking copper and surging broadband are high-percentage roads to telecom profits.

AT&T’s (T) proposed $39 billion buyout of Deutsche Telekom’s (DTEGY) T-Mobile USA unit has sparked a spirited debate about market power. Opponents charge the deal would allow AT&T and Verizon Communications (VZ) to jack up prices and stifle innovation, sharply reversing the trend toward lower prices and better services since the 1984 breakup of Ma Bell.

Missing from the debate, however, is the fact that the wireless business has been rapidly consolidating for years. The catalyst: an ever-increasing need for investment to support the rapid growth of connectivity.

The FCC is currently working on ways to shift spectrum from other owners, such as broadcasters, to wireless companies. In the meantime, buying T-Mobile and investing in its systems will relieve some of the stress on AT&T’s network. Verizon will have to make similar moves.

The upshot: When it comes to the connectivity explosion, the best bets by far are still the biggest.

Cable and television powerhouse Comcast’s (CMCSA) first-quarter numbers marked a return to the type of growth it enjoyed before the 2008-09 recession. Revenue soared 31%, but more important was growth of 14.1% in operating cash flow and 17.7% in free cash flow. Earnings per share, excluding one-time items, surged 16.1%.

The good news for these stocks is that investors appear to at last be giving them some credit, as all three are at or near 52-week highs. The trio, however, continues to trade at steep discounts to their late-1990s levels, when they were far less valuable as companies.

That, plus the lingering misconception that there can be only one ultimate industry winner, suggests considerable upside ahead for these stocks.

Buy AT&T up to $33, Verizon up to $40, and Comcast up to $25.

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