Opinions expressed in this piece are solely those of the author and do not represent the views of SNL Kagan.
The telecom industry is poised for upside despite increasing capital intensity, according to senior analyst Davis Hebert of Wells Fargo High Yield.
His telecom sector overview is part of a newly published corporate credit outlook report on 31 industries in 10 broad sectors covered by Wells Fargo high-yield bond analysts. I profiled his cable TV outlook in this blog on Dec. 13.
I like the unique perspective that high-yield investors have about risk, especially in capital-heavy industries like telecom. Both wireless and wireline carriers are increasingly challenging broadband and cable TV providers for residential and enterprise customers but will likely have to invest considerable capital ahead to effectively compete.
Hebert upgraded his telecom rating to "overweight" because he thinks the sector will outperform the overall high-yield market's projected average 5.3% total return in 2017. However, there is a lot of wiggle room in that overall market projection, with a spread of negative 9.7% on a bearish outlook to a positive 7.3% total return for the bullish case.
Rising interest rate environments breed volatility. But in any scenario, Wells Fargo believes that telecom will outperform the market.
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Year-to-date (through Dec. 15), the Wells Fargo telecom index has outperformed the high-yield market in total return by 523 basis points while missing the market's overall yield by just 34 basis points. Telecom was the best performing total return industry among the 31 profiled in Wells Fargo's 2017 outlook report (through Nov. 30).
In contrast, telecom pretty much matched the market's negative 4.8% total return and overall 8.8% yield in 2015. Keep in mind that the telecom index is a tale of two subsectors: higher performing wireless and lower performing wireline (as noted in the summary table above.)
Here are some key take aways from Hebert's outlook for telecom:
Positives
Negatives
Market share gains
M&A
The biggest laggard has been Level 3 Communications Inc. whose bonds initially slipped after the Oct. 31 news of its proposed $34 billion cash-and-stock acquisition by mid-market provider CenturyLink. Disappointed Level 3 investors had hoped the fiber backbone provider would be acquired by a large investment-grade player like AT&T or Verizon.
Financial expectations
Debt leverage