Fiber v. Copper: Investing
Upstream: The first way to get into an investment in fiber optics is through the actual producers of the cables. You should look into the well diversified company Corning Inc. (GLW). While corning is most famous for Gorilla Glass it is also the inventor of Optical Fiber. Because of it's diversification it is well poised to take advantage of any shift from copper cabling throughout networking and has made advancements in making it easier to do so for those that want to. If you question this just check out there presentation on why they will be the best.
Financially Corning is doing just fine and we will use The Steadfast Investment Strategy to evaluate it:
Midstream: TE Connectivity is the middle man between the manufacturer of fiber optic networking and copper networking and the service provider. However they are actually a combination of both upstream and midstream. Their products range from sensors that collect data, cabling that transfers the data, to building the networks that manage the data. They even make those sensors in the ground at traffic lights that know when there is a car present. As per TE Connectivity they operate in three segments: Transportation, Industrial, and Communication with their largest being transportation. The fact they are well diversified in the realm of connectivity will give them the ability, if done correctly, to take advantage of a larger demand for fiber optic networks.
Financially Corning is doing just fine and we will use The Steadfast Investment Strategy to evaluate it:
- P/E: 13.09 = 2
- DIV: 2.1% = 4
- DIV Inc: 8 yrs = 4
- DIV Payout Ratio: 31.6 = 2
- Net Profit Margin: 25.45% = 1
- Net Profit Margin Inc (4 yrs): -10% = 5
- Interest Coverage Ratio: 30.01 = 1
- 5 year Revenue Growth: 46.5% = 1
- CEO Score: 4 of 5 = 2
- Industry Growth Potential: 1
- Future Earnings Potential: 2
Corning Inc comes out with a total score of 2.27 that gives it rating between Buy and Hold. The only thing that concerns me is their decrease in profit margin of 4 years. While this sometimes may be due to business improving practices it is never a bad practice to be concerned about such an adverse statistic. And as far as their dividend goes they are still maturing in their shareholder return strategy but have increased their dividend 4 times in the last 8 years. They also announced a $1.5 billion share buyback program in December of 2014. Corning looks like a pretty good investment right now but if you are nervous about it's future you may want to wait for a better price.
Midstream: TE Connectivity is the middle man between the manufacturer of fiber optic networking and copper networking and the service provider. However they are actually a combination of both upstream and midstream. Their products range from sensors that collect data, cabling that transfers the data, to building the networks that manage the data. They even make those sensors in the ground at traffic lights that know when there is a car present. As per TE Connectivity they operate in three segments: Transportation, Industrial, and Communication with their largest being transportation. The fact they are well diversified in the realm of connectivity will give them the ability, if done correctly, to take advantage of a larger demand for fiber optic networks.
Financially TE Connectivity earns a grade 2.54 using The Steadfast Investment Strategy and is detailed below with the following financials:
- P/E: 17.58= 3
- DIV: 1.69%= 5
- DIV Inc: 8= 4
- DIV Payout Ratio: 31.7= 2
- Net Profit Margin: 12.86%= 2
- Net Profit Margin Inc (4 yrs): 3.77%= 2
- Interest Coverage Ratio: 13.96= 1
- 5 year Revenue Growth: 15.25%= 1
- CEO Score: 2 of 5= 4
- Industry Growth Potential: Strong= 2
- Future Earnings Potential: Strong= 2
A grade of 2.54 puts TE Connectivity at the lower end of being between a Buy and a Hold. While most of their financials are representative of a effectively functioning business they have some room for improvement in several areas, specifically CEO Score and Dividend. At a brief glance CEO Thomas J. Lynch may not embody the characteristics of a leader that constructs a company that changes it's industry. Rather it seems he is a leader that adapts to the changes in the industry. On the bright side their poor dividend score is due to a brief history as a dividend paying company and will improve in the future, they also returned $1 Billion to shareholders in 2014. On the upside they have an amazing opportunity in front of them in the Fiber vs. Copper battle and their Transportation segment. I am slightly concerned about the valuation of the company right now so waiting for a better entry price might be a good strategy.
Downstream: Verizon Communications Inc. (VZ) is the end supplier of the data that is transported over fiber, copper cabling, and through the air in it's wireless network. Verizon offers any type of telecommunication service from land line voice to machine to machine communication for individual consumers and businesses alike. Verizon has identified where the future is going and is adapting appropriately and early with the launch of Fios in 2005 (fiber to the home FTTH), the first 4G LTE network in 2010, and is attempting an A La Carte cable package. But the biggest positive is this excerpt taken from their 2014 annual report.
Now let's take a look at their financials by using The Steadfast Investment Strategy:
"A look at the communications marketplace in 2014 shows Verizon sitting at the sweet spot of the trends driving growth in our industry. Almost one in every three people on Earth has a mobile broadband subscription—that’s 2.3 billion people, double the penetration rate of just three years ago."With Verizon offering the most popular operating system in the world, Android, holding a market share of roughly 34% of wireless connections in 2014, and offering all of the most popular phones Verizon stands to take full advantage of the continued growth in telecommunications. Finally I had a personal experience where I received a free upgrade on a broken phone and amazing customer service from a human over the phone that ended in a reduction of $20 on our phone bill because the agent realized we were being over charged. While I can't speak for everyone else's experiences with Verizon mine have been pleasant as of late.
Now let's take a look at their financials by using The Steadfast Investment Strategy:
- P/E: 21.09= 4
- DIV: 4.36%= 3
- DIV Inc: 15 yr= 2
- DIV Payout Ratio: 57.4= 1
- Net Profit Margin: 9.41%= 3
- Net Profit Margin Inc (4 yrs): 5.39%
- Int Coverage Ratio: 3.98= 1
- 5 year Revenue Growth: 19.25%= 1
- CEO Score: 4 of 5= 2
- Industry Growth Potential: 1
- Future Earnings Potential: 2
A grade of 1.9 gives Verizon a slightly above buy rating, and is the first Public Company to do so being evaluated by The Steadfast Investor Strategy. Their financials are quite strong with revenue growth and dividend statistics leading the way. However Verizon is slightly overvalued with a P/E of 21.09. While their interest coverage ratio does score highly it has been one of the lowest I have evaluated yet and with +100 billion of debt on their books this makes me slightly nervous, regardless of it's use in acquiring the full stake in Verizon Wireless. However I think the move to acquire the entirety of Verizon Wireless from Vodafone for $130 billion will eventually pay off especially with the massive growth in mobile users. Here's a look at Verizon's CEO's (Lowell Mcadams) outlook on the telecommunications world and the digital economy. Verizon again is a company that you might want to wait for a better entrance price.
Regardless of if you invest in any of these companies the massive amount of competition being created in the telecommunications industry and digital economy will only create an environment that will benefit the entire world. Hopefully this competition will result in companies offering faster internet speeds through the extensive use of FTTH services. And don't be discouraged by waiting for a better price to enter into any position in any company. If they company to YOU is worth the price you are paying for it then you shouldn't hesitate. Just remember we are in this for the long run and please don't take my word for it...do your own research.
Regardless of if you invest in any of these companies the massive amount of competition being created in the telecommunications industry and digital economy will only create an environment that will benefit the entire world. Hopefully this competition will result in companies offering faster internet speeds through the extensive use of FTTH services. And don't be discouraged by waiting for a better price to enter into any position in any company. If they company to YOU is worth the price you are paying for it then you shouldn't hesitate. Just remember we are in this for the long run and please don't take my word for it...do your own research.
