In a recession, analyst Jonathan Chaplin of New Street sees telecom stocks, particularly carriers and towercos as a safe harbor for investors. Chaplin sees Verizon Communications (VZ) and the tower companies, like American Tower REIT (AMT) and SBA Communications (SBAC), as “most insulated,” while assigning higher risks for Dish Network (DISH), Sprint (S), AT&T (T), and the cable stocks.
In a recession, there are four factors to consider, he notes. For telecom stocks, Chaplin suggests that the most desirable stocks will be those with optimal wireless exposure, dividend support, the highest margins at the moment, and the lowest leverage. He concludes that “Verizon wins on all four fronts,” he said, with a nod to tower companies as being a close second.
“While T-Mobile would face slightly more risk than Verizon and the towers on a stand-alone basis, a merger with Sprint could almost entirely offset the impact of a recession,” he said. “It’s complicated: a deal would push leverage higher and lower margins at the outset, increasing exposure to a recession; however, the synergies should more than offset these pressures. At Sprint, deal approval would actually drive upside in a recession; however, we wouldn’t own Sprint because of the risk of restructuring if the deal breaks.”
Though they are also under the telecom umbrella, cable and Pay TV stocks are not recommended as recession beaters in Chaplin’s view. “In prior recessions, these industries have seen sharper slowdowns in revenue growth and greater reductions to valuation multiples relative to other industries in our coverage,” he said. “In the case of Pay TV, we think recession risk would be worse today because there is now a viable substitute – OTT – [steaming media] that wasn’t present in prior recessions.”
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