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Nomura Securities on Large Cap Telecom: Calm Before The Storm

October 27, 2011 10:26 AM EDT Send to a Friend
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Nomura Securities on Large Cap Telecom: Calm Before The Storm - Past returns not indicative of future results by Mike McCormack

McCormack said, "We expect that the focus of telecom investors will remain on wireless, with no meaningful evidence of improving enterprise or SME trends. On balance, we viewed the trends across the postpaid carriers as relatively strong, specifically margins. However, with margin strength attributable to noticeably curtailed customer activity ahead of the iPhone (Nasdaq: AAPL) refresh, we assign little staying power to the strength going forward."

"In our view, the outlook for wireless margins remains troubling, as the combination of equipment subsidies, largely unchanged churn profiles, and decelerating service revenue growth are not reflecting the bullish view on smartphone penetration. Unless an operator can demonstrate a credible case for a discrete incremental IRR, either through extended subscriber life, or a higher contribution margin, we believe that investors should reassess the assumption that margins will recover. We view Sprint’s internal assumptions presented with 3Q results as particularly troubling."

AT&T (NYSE: T) : A low bar, compelling if service revenue reaccelerates: Despite somewhat disappointing 3Q11 results, with weaker-than-expected wireless net additions, decelerating ARPU growth, and likely temporary wireless margin strength, the outlook is encouraging.

Verizon (NYSE: VZ): 3Q margins impress, focus shifts to 4Q iPhone impact: Verizon posted an impressive quarter, led by strength in wireless. Notably, wireless margins of 47.8% contributed to an overall $0.02 EPS beat. Despite our enthusiasm for the third-quarter results, we continue to find valuation a hurdle. With the shares trading at nearly a 30% premium to the nearest competitor, AT&T, we believe that characteristics such as above peer growth and the perception of network superiority are already discounted in expectations.

Sprint (NYSE: S): Must subscribe to extraordinary outlook to own the stock: Sprint’s 3Q results were broadly ahead of our estimates. In summary, postpaid net adds were ahead of estimates, Sprint had sector-leading 5.3% y/y wireless postpaid ARPU growth, and 17.6% Wireless EBITDA service margin was well ahead of our 14% estimate. That said, the outlook has been severely impaired. In our view, the magnitude and duration of adjustments needed to look past the $9.1bn in near-term incremental spending add such a significant element of risk that investment becomes unattractive even as the share price continues to slide.




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