What to Expect for Telecom in 2014 | Cannon Group | Your trusted experts in telecom management.
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What to Expect for Telecom in 2014

What to Expect for Telecom in 2014

Predictions for 2014 by Morgan Stanley

January 2, 2014

With 2013 officially in the past, it’s time to start looking toward the future. According to a report by Morgan Stanley, 2014 could bring lots of change for the telecom industry. Here’s a quick run-down:

 

Key value drivers for 2014 (below) raise big fundamental and strategic questions.

 

Get ready for a volatile year and potential 1Q underperformance with several important catalysts. FCF pressures are a risk as the spectrum land grab heats up, the end of bonus depreciation drives cash taxes higher, payout ratios increase, leverage levels trend above historical levels, and rising interest rates makes Telecom less attractive (but reduces the pension / OPEB burden.). A LTE arms race continues keeping capex elevated and squeezing free cash flow further. Looming regulatory issues drive strategic uncertainty, most importantly around wireless M&A, as investors focus on unlocking shareholder value.*

 

Morgan Stanley identified key value drivers (below) that could raise important questions:

  • Could Free Cash Flow (FCF) pressures drive multiple compression?

  • Is a wireless price war inevitable?

  • Will the DC Discount fade?

 

KEY VALUE DRIVERS WHAT TO WATCH
M&A / Regulation FCC, DoJ, EU
Wireless Wars ARPU, Churn, Capex
Macro Fed, Bond Yields, Tax Policy
*Based on reports by Morgan Stanley

 

In addition, important catalysts (below) could drive a volatile year and potential underperformance in Q1:

  • Shareholder returns (dividends + buybacks)

  • T-Mobile’s momentum

  • Potential wireless price war

  • M&A (closings and potential deals) and beginning of integration / strategy

  • Spectrum auctions (Canada and US)

 

Wireless maturation is one challenge to growth.

 

Churn trends should remain mixed as the list of competitive catalysts continues to grow, emphasizing the next leg of growth beyond smartphones. We continue to view Canada as a wireless safe haven with wireless postpaid driving continued growth. Towers remain attractive on higher wireless network spend while at a discount to REITs, despite strong AFFO per share growth.*

 

The increasing number of competitive catalysts emphasizes the next phase of technology growth, beyond smartphones.

COMPETITIVE CATALYSTS NEXT LEG OF GROWTH
T-Mobile’s “Un-carrier” strategy continues Internet of things
Price decrease in AT&T’s Mobile Share from December 2013 AT&T Digital Life
Price war potential Connected / autonomous car
Sprint Spark traction and Network Vision completion Machine-to-machine (M2M)
Dish partnership could materialize Wearable devices (e.g. Google Glass)
IDEN related churn concludes Mobile payments
4G / LTE rollouts and densification gain more momentum
Spectrum crunch drives capacity headwinds
*Based on reports by Morgan Stanley

 

Network investment has been a wireline differentiator…

 

And content wars are a growing risk in the U.S., as Telcos attempt to compete more effectively with Cable. Wireless substitution remains a long-term threat and enterprise demand has yet to improve, while competition weighs on data center names driving valuations to re-rate lower.*

 

What to watch for regarding content wars:

  • Verizon / NFL

  • BT / Premier League

  • Rogers / NHL

  • Sunday ticket expires in 2014

 
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* Note: To view the graphs and data associated with these statements, click here.


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