Fiber v. Copper: Investing

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:

1. P/E: 13.09 = 2
2. DIV: 2.1% = 4
3. DIV Inc: 8 yrs = 4
4. DIV Payout Ratio: 31.6 = 2
5. Net Profit Margin: 25.45% = 1
6. Net Profit Margin Inc (4 yrs): -10% = 5
7. Interest Coverage Ratio: 30.01 = 1
8. 5 year Revenue Growth: 46.5% = 1
9. CEO Score: 4 of 5 = 2
10. Industry Growth Potential: 1
11. 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:    

1. P/E: 17.58= 3
2. DIV: 1.69%= 5
3. DIV Inc: 8= 4
4. DIV Payout Ratio: 31.7= 2 
5. Net Profit Margin: 12.86%= 2
6. Net Profit Margin Inc (4 yrs): 3.77%= 2 
7. Interest Coverage Ratio: 13.96= 1
8. 5 year Revenue Growth: 15.25%= 1
9. CEO Score: 2 of 5= 4
10. Industry Growth Potential: Strong= 2 
11. 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.

"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:

1. P/E: 21.09= 4
2. DIV: 4.36%= 3
3. DIV Inc: 15 yr= 2
4. DIV Payout Ratio: 57.4= 1
5. Net Profit Margin: 9.41%= 3
6. Net Profit Margin Inc (4 yrs): 5.39%
7. Int Coverage Ratio: 3.98= 1
8. 5 year Revenue Growth: 19.25%= 1
9. CEO Score: 4 of 5= 2
10. Industry Growth Potential: 1
11. 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. 

     

Fiber v. Copper

Fiber v. Copper: 

How will our networks support our data

   
     Think of our global data network just like our water infrastructure. There are places where we store our data just like we store our water at reservoirs. The water coming directly out of the reservoirs is transported in huge pipes because it needs to supply an increasing population just as data does. From the huge pipes it goes into smaller pipes located in the cities and eventually into the small plumbing in the houses and businesses that supply water to the end users just like data does. The only difference is that the end user data usage is changing quickly to ever increasing levels. This means that the current infrastructure at the end user level won't be able to support massive amounts of data that we want and need.
   
     Fiber optic network cables have been around for a very long time. It was first developed in 1970 by Corning Glass Works a precursor to Corning Inc. the famous Gorilla Glass producer. But it was not widely used until about 1990 and is now the backbone of data transfer over the world just like those huge pipes that transfer our water.
     Copper cabling is not going anywhere, it will be here for the foreseeable future because it is the only way to transport electricity. But for networking purposes we are going to need something that will be able to handle massive amounts of data to the end user.

     Copper Cabling can hold up to 10 gigabit ethernet (at short distances) but that won't cut it in the future for data transfer because of one thing, the attenuation or loss of strength that occurs during transmission of data. Copper can support ever increasing amounts of data but when that occurs you shorten the distance that you can transport that signal strength. This requires highly engineered cables that may be to expensive for the customer and need to be upgraded in the future to hold larger data demands.
     Fiber however can transmit massive quantities of data, over longer distances, with lighter & thinner cables. This allows for use of existing framework of networking like the cabling ducts in building and pipelines underground. The only negative to fiber is that some networks may need to be completely overhauled.

Copper vs. Fiber Networking

     There are some very attractive long term savings for switching to fiber networks. The number one advantage is the overall longevity of the fiber network. The fiber network will be able to hold data loads well into the future because of it's immense capacity. Data requirements will catch up to copper networks much faster meaning an overhaul would be needed sooner. Fiber networks are also more durable than copper ones and will require less replacement of cables.
     Fiber networks require much less energy to operate. Copper networks require electricity to transmit and cool networks because of the heat created by the electricity flowing through the network. Because signals are transmitted with light on fiber networks they require much less electricity to transmit and almost none to cool. This also means there will be very little risk of a fiber network being a fire hazard for your building. Overall reduction of electrical usage will make your building much more environmentally friendly and less costly to operate.

Advantages of Fiber

     Copper networks need to be engineered carefully because of the electro magnetic interference they create. This interference can ruin the signals of other surrounding wires and can also be monitored by outside sources that you may not want monitoring your network. Fiber optic cables on the other hand do  not emit electro magnetic fields because there is no electricity flowing through them. This means there is no interference with other cables and the only way to monitor the data would be to physically
tap into the connection making it's physical security very easy to control.

     The advantages of fiber networks will materialize when the Internet of Things comes to full fruition. The amount of data being transferred when everything is connected will be chocked by copper networks inability to handle it's demands. Company's that switch their networks to fiber will not only be saving money in the long run do to less maintenance, upgrades, and electrical usage but can reap the benefits of having a business connected to the Internet of Things.