Why The Cuban Dream May Be Over For U.S. Telecom Operators

President Donald Trump recently announced that his administration will do away with many policies related to the communist state of Cuba, taken by his predecessor, Barak Obama. As a result, the previous regime’s decision to normalize U.S. diplomatic and economic relations with Cuba, which has been considerably strained since 1961, is under threat once again.

Under Obama’s administration, new Cuban policy regulations, approved by the Treasury and Commerce departments, aided the U.S. telecom industry to gain initial exemptions from the existing embargo to invest in Cuba. The newly developed truce between the two countries enabled these telecom operators to export equipment and services to Cuba. Moreover, they were permitted to establish the necessary infrastructure in the region for offering various telecom services, including the Internet.

Advantages to U.S. Telecom Operators

In Mar 2015, U.S.-based IDT Corp had formed a joint venture with Cuba's state-run Empresa de Telecomunicaciones de Cuba SA (ETECSA) to provide direct international long-distance service. In Sep 2015, Verizon Communications Inc. (NYSE:VZ) became the first U.S. telecom operator to offer roaming wireless services in Cuba.

Meanwhile, in Nov 2015, Sprint Corp. (NYSE:S) signed the first direct roaming wireless service agreement with ETECSA. Earlier, in Apr 2015, Sprint’s prepaid service division – Boost Mobile – had launched an unlimited voice call and text message service plan between the U.S. and Cuba.

In May 2016, T-Mobile US Inc. (NYSE:T) had also signed an interconnection and roaming wireless service agreement with ETECSA. Notably, T-Mobile US serves the maximum number of U.S. customers who are of Cuban descent. Furthermore, starting from Oct 18, 2016, U.S. telecom giant, AT&T Inc. (NYSE:T) , has been offering direct roaming mobile interconnection services to Cuba.

All four stocks mentioned above currently carry a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Trump to Impose Business Restrictions

Trump is unlikely to reverse all the reforms taken by his predecessor. However, the current administration will go all the way out to limit commercial relations with the Cuban military's business and commerce wing, Grupo de Administración Empresarial (GAESA). This conglomerate is managed by the Cuban military and is benefiting from the opening in U.S.-Cuba relations.

It has been widely considered that the Cuban military could be the beneficiary of increased American private investment. According to Trump “the money is used for more repression and to crush the peaceful democratic movement resulting in large scale human rights violations.” Even though the existing business deals have been spared, the U.S. firms will face tougher restrictions to expand their businesses in Cuba in the future.

Our View

We believe that the U.S. telecom operators may not reap any near-term benefits from Cuban investments as the country is less developed at present and reels under highly restrictive government regulations. However, in the long-term, Cuba may become a boon for those telecom carriers who choose to operate in the country. To sell products and services to 11 million untapped customers is a very lucrative and enticing opportunity.

Further, with the weakening of communism and its willingness to enter the economic as well as political mainstream, Cuba is poised to become an attractive emerging market in the future. Additionally, the country’s geographical proximity to the U.S. is a major positive for these telecom operators from the standpoint of cost of operations.

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