Pacific Crest Gives Overview on Communications Services Sector

The communications industry can be an adventure for investors, with volatile and rapid changes. On Monday, Pacific Crest Securities analyst Michael Bowen published his thoughts on the communications services sector.

Verizon Communications Inc. (NYSE: VZ) is Pacific Crest's top carrier pick, with superior operating and financial metrics. 

"We continue to believe VZ's premium valuation is warranted due to the greater growth prospects in wireless and greater opportunity for improvement in wireline EBITDA margin at Verizon," Bowen commented. "We expect Verizon to grow wireless retail postpaid revenue at 4.5 percent  y/y, compared to 3.9 percent for the other two carriers in 2014." 

"We also expect Verizon to end the year with a lower proportion of smartphone penetration (69 percent vs. T at 73 percent)," he added, "which we believe will disproportionately benefit Verizon in 2014 and beyond as expected increased LTE data usage increases average revenue per account (ARPA)." 

Verizon is rated as Outperform by Pacific Crest, with a $58 price target.

With solid progress and possibly better EBITDA growth than Verizon, AT&T, Inc. (NYSE: T) is closing the performance gap. Bowen rated AT&T as Sector Perform.

The analyst also downgraded Sprint Corporation (NYSE: S) from Outperform to Sector Perform, as shares have been trading above Pacific Crest's $7.50 price target. Pacific Crest added that Sprint currently trades at a 22 percent premium to the group, at 8.1x 2014 EV/EBITDA.

"Sprint's network build-out and investment should pay off in late 2014," Bowen wrote, "but we will have to see this translate into material upside to financial results to justify further valuation multiple expansion, in our opinion."