The S&P 500 (^GSPC) Communication Services Sector (XLC) has gained 13% year-to-date, with stocks spanning across the tech and streaming industries. KeyBanc Capital Markets Research Analyst Brandon Nispel joins Market Domination to share his top picks within the sector.
Nispel identifies AT&T (T) as a "third-place network" in the wireless space, preferring names like Verizon (VZ) and T-Mobile (TMUS). He highlights Verizon as "a turnaround story," with the consumer business experiencing a resurgence since the appointment of a new CEO at the company. Nispel also considers T-Mobile "a top call" due to the organic growth performance of the business, stating, "You can't find that type of growth" among traditional communication services stocks.
Shifting his focus to the telecommunications industry, Nispel recommends Comcast (CMCSA)— saying the company has the "best network in the business." He notes that Comcast has invested extensively in its cable network infrastructure, making its technology highly sought after. However, Nispel believes Comcast should actively pursue efforts to monetize its "under-appreciated assets."
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Editor's note: This article was written by Angel Smith
Video Transcript
JULIE HYMAN: The communications services sector, it's a hodgepodge of stocks with names ranging from traditional telecom like Verizon, tech Giants like alphabet, and streaming services like Netflix. The sector is one of the top performers during the first quarter boosted by big names like Meta and Disney. But let's talk about where there are other pockets of opportunity within that group.
We're looking at how to navigate the big picture with the Yahoo Finance playbook. Joining us now is Brandon Nispel who's KeyBanc Capital Markets Equity Research Analyst. Thanks so much for being here, Brandon.
I actually want to start you off with a company that had a little bit of news over the weekend. And it wasn't very positive for it. I'm talking about AT&T with the news that a number of its accounts had information leaked.
It's now scrambling to reset passwords. And it's already been a tough past 12 months for AT&T with the stock down 10%. I don't think you like it, though, judging from your most recent note on the wireless industry. You wouldn't step in here.
BRANDON NISPEL: No, it wouldn't. From our perspective on AT&T, they're a third place network and third place in terms of subscribers in the US, you know. I think you see the third place network manifest itself in the network outage that they had this year.
The data breach, which is driving the stock down today. We actually don't think that big of an issue. A lot of that news was already out just a month or two ago. And so it seems like just the headlines are catching up to AT&T. But we prefer Verizon and T-Mobile in the wireless space.
JOSH LIPTON: And how come, Brandon? Why would you prefer Verizon and T-Mobile here?
BRANDON NISPEL: For Verizon from our perspective, it's somewhat of a turnaround story on their consumer business. They've been losing subscribers in their consumer group for the last several years. They put a new CEO in place in 2022 who's made some operational changes.
And now, the company's expecting to return to positive consumer postpaid phone net adds in 2023. And all of that is leading to ultimately a better EBITDA growth profile and really strong free cash flow for Verizon.
JULIE HYMAN: And then there's the other one. There's T-Mobile which has been the winner over the past year in terms of its share performance and also both because of its merger, but also organic growth that it's been the one that has kind of been now the second place player, that was the third place player that has kind of caught up.
BRANDON NISPEL: Yeah, no, absolutely. T-Mobile's been one of our top calls in the wireless space for a long time. And it's mainly a function of the organic growth of the business.
They're growing EBITDA at high single digits. And we think that can continue. You can't find that type of growth in some of the more traditional com services space.
And all of that growth is really a function of them growing market share. They've had the ability to catch up from a 5G perspective after their merger with Sprint. And a lot of that integration effort is now behind them. So they've been able to capture synergies while also improving the quality of their network, which is a really good combination in our view.
JOSH LIPTON: And, Brandon, for viewers who are listening right now, Verizon and T-Mobile specifically. What are the downside risks to your call there?
BRANDON NISPEL: The downside risk is that they don't execute in terms of how investors expect to the point on Verizon. Verizon has guided us to expect consumer postpaid phone net adds to turn positive. So you want to see progress on that throughout the year.
Same with T-Mobile. T-Mobile, we think is going to be a beat and raise type of story. And we think the stock needs it to move higher. And so for T-Mobile to just come in line, I think that would be a risk to our view there.
JULIE HYMAN: And then, Brandon, getting away from just sort of pure wireless providers and telecom providers. You also like Comcast here. And in a recent note, or I guess when you sort of came out with a recommendation to buy it, you called it a tech company stuck in a cable body. Explain what you mean by that.
BRANDON NISPEL: You know, Comcast has a lot of really interesting tech, whether it goes into the network. And I think their network is by far and away the best network in the business. There's a reason why companies license a lot of their technology is because Comcast has spent so much time investing in their cable network.
And on the streaming side, I think you can argue that there's a mini Trade Desk in this business. There's a Roku in this business, which we think is pretty underappreciated by investors.
JOSH LIPTON: Do you like it better than charter, Brandon?
BRANDON NISPEL: Absolutely. As we look and compare and contrast, the difference between Gymnast and Charter, Charter is spending more capital upgrading their network than Comcast is. Ultimately, Comcast is growing free cash flow and has lower leverage. And those are just a couple of the reasons why we like Comcast over Charter here.
JULIE HYMAN: And you talked about that the market under appreciates these sort of other pieces that are within Comcast. Sometimes in these situations, you then get an activist to come in and say, well, you should spin it out. So it's appreciated. What do you think is the catalyst to get the market to realize the value of some of these internal businesses?
BRANDON NISPEL: That's a really good question. It's one of the debates that we have often with investors. I think investors do want to see Comcast split off part of their media assets. Ultimately, I think what we want to see is some of the underappreciated assets, whether it's their Xumo JV, which is effectively like a Roku competitor.
We want to see them monetize that better. We want to see losses on their media business, especially Peacock and prove. Comcast is tough, though, because it's a conglomerate. It's run by a family or the family has majority ownership. And so it's tough to split those up.
JULIE HYMAN: Brandon, finally, I want to zoom out a little bit. Because we came into this segment describing how the S&P communication services index whose ticker is still T-E-L-S reflecting its telecom roots is so sort of diverse. It has these sort of new telecom, or new services companies old telecom companies. Do you think investors should still look at those as a basket and that it is a good time to buy the basket as a whole?
BRANDON NISPEL: I generally don't take that view. I segment the comm services space between the new tech and the traditional. And I cover a lot of the traditional names. And from my perspective, that's a space that you want to be relatively cautious on. You don't want to just buy everyone in the basket. So, you know, Verizon and Comcast are two of the names that we really like in our basket.
JOSH LIPTON: Brandon, thanks so much for joining the show today. Appreciate it.