Three Communications Stocks Set To Rip Higher In 2020

The Communications Sector Is Breaking Out

The Communications Sector (XLC) is breaking out to new highs and with it an opportunity for profits in 2020. The sector is being supported by a robust earnings outlook that promises to deliver market-leading performance next year.

On a sector basis, EPS growth among communication stocks in 2019 wasn’t much to write home about, only about 4.8% if the 4th quarter reports are as-expected but much better than most. The average S&P 500 company will be lucky to post EPS growth this year at all, most will see their earnings shrink on a YOY basis.

Looking to next year the outlook for earnings growth among the Communications stocks is much better. The Communications Sector should see its earnings growth accelerate to over 12.0% and well above the consensus average for the S&P 500. One of the big drivers of earnings growth next year will be the roll-out of 5G. Names like AT&T (T), Verizon (VZ) and T-Mobile (TMUS) have already begun launching the service that is expected to grow at a CAGR of over 55% for the next five years.

Verizon Surpasses Its 5G Goals

On a technical basis, Verizon is the most attractive play in the 5G arena. The stock is already breaking out to new highs while AT&T struggles with resistance and T-Mobile lags. The stock’s performance can be attributed to one thing, its industry-leading position in the 5G market.

Verizon has been working hard all year to get its services up and running. The company already offers seven 5G-enabled devices and the fasted 5G networks around. When it comes to the network, Verizon is outperforming its own forecasts with over 30 cities, 15 NFL stadiums and 4 indoor arenas in service. AT&T has limited service in only 10 cities while T-Mobile’s nationwide coverage is only the “light” version of 5G.

The key to Verizon’s success lay in its strategy. The company has invested deeply in the millimeter-wavebands required for the fastest services, it has the best end-to-end fiber optics networks, and the ability to deploy numerous small-cell 5G hubs at will.

Adding to Verizon’s attractiveness is the yield. At today’s prices, Verizon pays 4% of its share value and the distribution is safe. The company’s payout ratio is a low 51% which leaves plenty of room for future increases even without the expectations for EPS growth. Verizon has been raising its dividend for 12 years.

Facebook, Revenue Growth Says It All

Facebook (FB) is not the poster-child for scandal-free business. That said, the company has been able to weather its storms with aplomb and deliver shareholder value year in and year out. Highlights from the last earnings report include growing top and bottom-line results, user growth across the operating area, improving user engagement, and rising ad-revenue per user. What this means for investors is an improvement to already-stellar free-cash-flow. Because Facebook typically uses 20%+ of its free-cash-flow for stock buybacks we can expect to see buybacks continue in 2020, and accelerate.

The consensus estimate for Facebook’s revenue growth in 2020 is just shy of 22%, nearly double the outlook for communications stocks in general. The outlook for EPS growth is less robust, only 7.0%, but there are mitigating factors. The company is expecting to make some major investments in its expansion and operations over the next year, and management is notoriously conservative in their projections. Facebook tends to beat estimates 100% of the time.

Charter Is Winning The Cable Wars

Charter Communications (CHTR) has been a rip-roaring ride this year and up nearly 80% YTD. The gains are driven by a variety of factors including strong top and bottom-line growth, and vigorous buyback programs.

Charter has been growing at a solid double-digit pace in the last few years and that is expected to continue in 2020. The outlook for 2020 calls for consensus revenue growth in the 4% to 5% range but that’s not what has the market’s attention. EPS is expected to double over the next year.

Charter has repurchased and retired more than 21% of its shares since it began the buyback program in 2016. More than 2.7 million of those shares were bought back in the last quarter alone. Investment analysts at Cowen just named Charter a “Best Idea” for 2020 citing its free-cash-flow growth and an “envious position” that enables it to continue buying back shares while simultaneously investing in growth. Shares of Charter are breaking out to new all-time highs right now.