As we start to dissect and analyze sectors as part of our forecasting for the second half of 2008 Zacks senior telecom industry analyst David Weissman, CFA stopped by to help us out.

Have we noticed a somewhat more favorable light being cast on the telecommunications industry these days?

Investing in the telecommunications industry has become more favorable with recent valuation pullbacks of major telecom equity shares and as telecommunication companies reduced spending and improved operating performance to facilitate turnaround conditions when they do occur.

In addition, telecommunications companies continue to be the largest group in terms of Mergers and Acquisitions [M&A]. Consolidation among the largest telecommunications services-focused companies has created an environment where equipment-focused companies now interact, on a relative basis, with fewer customers and reduced selling opportunities. This has incubated consolidation among equipment companies, as well to enhance marketing value by broadening product offerings for converged wireless and wireline networks.


What's worse about the near-term outlook these days?

While telecom carriers plan to increase capital expenditures in 2008, they will be more selective on technology choices and identify cost savings synergies, such as streamlining purchasing arrangements and limiting the number of preferred vendors. In addition, shareholders continue to foster an environment where executives are held accountable to focus more on balance sheet improvements, financial discipline and improving free cash flow. This promotes greater diligence in investment decisions for long-term growth initiatives. Unfortunately for the equipment vendors, the conservative nature of tightened capital outlay remains the method of choice for improving free cash flow.

Companies that offer the most opportunities are focused on third-generation (3G) wireless, broadband (DSL) and fiber-to-the-home/node networking. There are also a few market leaders that have proven able to survive the sometimes turbulent opportunity swings in the industry.

So, with all that said, where are your telecom Buy recommendations right now?

We continue to rate China Mobile (CHL), the largest cellular carrier in the world, with a Buy Rating. China Mobile's market valuation has declined in recent months based on what we believe are related to general global equity market weakness and additional levels of risk associated with the announcement of mandated telecom restructuring imposed by China's government.

However, it remains our view that these emerging and restructured competitive entities will have unanticipated challenges deploying and advancing services to levels and coverage delivered by the incumbent. Accordingly, we assess that successful expansion initiatives in rural regions of China, along with effective network optimization strategies and customized mobile value-added services, already establish China Mobile as the dominant mobile service provider, far ahead of competitors which include China Unicom/Netcom (CHU) and China Telecom (CHA).

China Mobile currently commands 69% share of the total Chinese wireless market. Significant opportunities, including the 2008 Olympics and near-term communications demand, still remain regardless of additional competitive conditions due to a substantial untapped user market, not to mention emerging valued-added offerings to follow.

The other is for Chungwha Telecom Co. (CHT), the Taipei-based company which is the largest telecom supplier in Taiwan. We believe the gradual migration to 3G wireless technology is likely to benefit the company's financials in 2008 and beyond.

Since the telecom subscriber base of Taiwan is near saturation, Chunghwa has undertaken initiatives, in synergy with its strong balance sheet, to implement a next-generation converged-IP network as it expands coverage outside Asia. This new endeavor enables the company to provide services in different regions of Europe and the U.S.

David Weissman, CFA is a senior analyst covering the telecommunications industry for Zacks Equity Research.