The global economic downturn continues to weigh on companies in almost every industry, including telecommunications. Nevertheless, we see a silver lining for the telecommunication industry in this challenging environment as the valuation level now reflects remedial conditions in the economy. Depressed stock prices may make investment entry points more favorable at this juncture, should stimulus plans improve worldwide economics.
The industry encompasses a lot of technology-related businesses. Besides the traditional local and long-distance wireline telephone services, telecommunications also include wireless communications, Internet services, fiber optics networks, cable TV networks and satellite communications.
According to our assessment, overall economic dynamics may shift in favor of the telecommunications industry, although at a very slow pace, primarily due to its basic nature of being a major infrastructure product for both the emerging and developed nations.
Telecom companies are starting to report some financial improvements in terms of revenue and earnings levels. In addition, economic stimulus plans throughout the world -- including the U.S. broadband infrastructure development program and similar structural subsidies in China and India -- may be a boon for selected telecom service providers and equipment manufacturers.
Capital spending constraints among carriers over the last couple of years due to severe recessionary conditions was the main hindrance for the growth of this industry. However, we see a ray of hope as large telecom service providers are gradually expanding their fiber-based networks on the back of significant subscriber growth. Telecom carriers are expanding their data transmission capabilities through fiber optic cable to residential customers, offering cable television, video-on-demand, faster high-speed Internet, and conventional telephone communications over a single line.
Several giant telecom operators globally are also funding huge projects to deploy next-generation (4G) high-speed network of WiMAX and LTE (Long-Term Evolution). Cable TV operators, which are major competitors to telecom giants, are also upgrading their networks with high-speed DOCSIS 3.0 architecture. These developments are likely to help telecom equipment manufacturers consolidate their top-lines.
The growth of high-speed Internet and video services leads to continued upgrades of telecommunications networks. As of now, both the telephone service providers and cable TV operators are offering cable television, high-speed Internet and phone services. This, in turn, raised the demand for telecom equipment, and its manufacturers are benefiting.
It is our belief that at this stage, companies with strong balance sheets and firm net cash positions, along with sustainable dividends, provide respectable risk/reward profiles.