NEW YORK (TheStreet) -- Citigroup analysts recently upgraded the telecom sector to overweight from neutral, citing the sector is poised to outperform in valuation terms and seasonality.

According to a report issued by Fitch Ratings, the U.S. Telecom and Cable Sector's liquidity has remained strong enabling issuers to diversify revenue profiles through acquisitions beyond their core legacy services, and issuers remain well positioned in the face of economic uncertainty. The sector's second-quarter liquidity has remained strong with 91% of committed facilities available for borrowing, and total liquidity exceeding the aggregate 2011, 2012, and 2013 maturities. Additionally, favorable top-line growth and expanding margins have increased EBITDA levels, leading to stable leverage as debt levels have increased.

These five telecom stocks have potential upsides ranging from 9% to 36%. The average buy and hold rating for these stocks is 58% and 41%, respectively, according to analyst estimates compiled by Bloomberg.

The stocks are arranged in ascending order of upside potential.


5. Verizon Communications ( VZ - Get Report), a holding company, provides communication services in two segments: Domestic Wireless and Wireline. Within Wireline, it provides voice, Internet access, broadband video and data, Internet protocol (IP) network services, network access, long distance and other services.

The company reported consolidated revenue of $27.5 billion for the second quarter of 2011, an increase of 6.3% year-over-year. It swung to diluted earnings per share of 57 cents compared to a loss of 42 cents per share and adjusted non-GAAP EPS of 51 cents in the year-ago quarter. Total connections in the wireless segment grew 6.6% to 106.3 million. Cash and cash equivalents increased to $6.2 billion at the end of June 2011 from $4.8 million in the same month prior year.

Early September, Verizon declared quarterly dividend of 50 cents per share, up 2.6% from the prior quarter. The dividend payouts for the first half of 2011 totaled $2.8 billion.

Verizon is scheduled to release its third-quarter earnings on Oct. 21, and is likely to record earnings per share of 56 cents, vs. 31 cents in the same quarter prior year, according to a consensus estimate of analysts polled by Bloomberg. Sales are seen growing 5% to $27.9 billion with gross margin increasing 163 basis points to 59.15%.

Of the 35 analysts covering the stock, 40% recommend a buy and 57% rate a hold. Data from Bloomberg has analysts forecasting the stock gaining 8.5% to $38.82 in the upcoming 12 months.

4. American Tower ( AMT - Get Report), a holding company, is a wireless and broadcast communications infrastructure company that owns, operates and develops communications sites. Its main business is to lease antenna space on multi-tenant communications sites to wireless service providers and radio and television broadcast companies.

For the second quarter of 2011, the company recorded total revenue of $597.2 million, an increase of 27.1% from the year-ago quarter. Meanwhile, total rental and management revenue was up 27.9% to $583.8 million. Net income attributable to the company increased to $115.2 million, or 29 cents per share, from $99.7 million, or 25 cents, in the year-ago quarter. During the quarter, the company spent almost $275.2 million on acquisitions including 400 towers related to the joint venture MTN in Ghana, 170 towers in Chile, 23 and 15 in Brazil and Colombia, respectively.

The company recently received SEC approval to establish and potentially sell its shares in its new entity American Tower REIT Inc., which would eventually absorb all the existing operations of American Tower. Earlier in May, American Tower had announced its plans to distribute almost $200 million in earnings in the fourth quarter. Also, it is likely to declare regular quarterly distributions after converting into a REIT in 2012.

For full year 2011, the company estimates total rental and management revenue to range from $2,330 to $2,370 million. Income from continuing operations is seen between $370 and $410 million, while the range for adjusted EBITDA is $1,550 to $1,590 million. These estimates include the impact of the expected acquisition of 800 towers in Ghana in the third quarter 2011 and the recently acquired 329 towers in South Africa and 15 towers in Colombia.

Of the 21 analysts covering the stock, 90% recommend a buy and the rest rate a hold. There are no sell ratings on the stock. Data from Bloomberg has analysts forecasting the stock gaining 13.6% to $62.55 in the upcoming 12 months.

3. AT&T ( T - Get Report), a holding company, provides telecommunication services in the U.S. with operations in four segments: wireless, wireline, advertising solutions and other services like which providing results from customer information services and all corporate and other operations.

The company's consolidated revenue for the second quarter of 2011 was $31.5 billion, an increase of $680 million from the year-ago quarter. Net income for the quarter stood at $3.6 billion, or 60 cents per share. Wireless revenue growth was 9.5%, while wireless service revenue was up 7.4%. The second quarter recorded smartphone sales of 5.6 million, while total wireless subscribers swelled 1.1 million to 98.6 million.

The company estimates full-year capital expenditure of $20 billion from the earlier low-to-mid $19 billion range. Recently, AT&T declared a dividend of 43 cents per share payable Nov. 1, 2011. Late September, Superclick announced a definitive agreement for acquisition by a subsidiary of AT&T in an all-cash transaction valued around $15 million. The deal is expected to close in the fourth quarter of 2011.

AT&T is scheduled to release its third-quarter earnings on Oct. 20. A consensus estimate of analysts polled by Bloomberg expects the company to record $31.63 billion sales, vs. $31.58 billion in the same quarter prior year. The company is likely to achieve 12% increase in net income to $3.6 billion from $3.2 billion in the previous-year quarter. Dividend per share and gross margin are forecast to rise 2% each.

Of the 32 analysts covering the stock, 53% recommend a buy and the rest rate a hold. There are no sell ratings on the stock. Analysts polled by Bloomberg expect the stock to gain an average 14.4% to $32.40 in the upcoming 12 months.

2. Windstream ( WIN - Get Report), a communications and technology solutions provider, focuses on complex data, high-speed Internet access, and voice and transport services to customers in 29 states.

For the second quarter of 2011, the company recorded total revenue of $1.03 billion, up 12% from the same quarter prior year. Net income grew 18% to $93 million, or 18 cents per diluted share. Capital expenditure for the quarter amounted to $172 million, a 74% increase from the second quarter of 2010. Almost 4,800 new high-speed Internet customers were added during the quarter.

Windstream pays an annual dividend of $1 per share, or dividend yield of nearly 8%. Recently, Windstream Hosted Solutions launched its second-generation cloud platform designed to meet the strong demand for cloud computing services. This platform incorporates solutions from industry leaders such as VMware ( VMW - Get Report), NetApp ( NTAP - Get Report), EMC ( EMC) and others and provides a comprehensive solution that caters to the production and disaster recovery needs of businesses.

Early August, the company entered into a definitive agreement to acquire PAETEC Holding ( PAET) in a transaction valued around $2.3 billion. The deal is expected to generate annual pre-tax operating cost synergies of approximately $100 million and capital expenditure savings of approximately $10 million, which are expected to be fully realized by the third year after closing. The acquisition is expected to close within six months subject to approval. The merger is under review at the Federal Communications Commission (FCC).

Of the 18 analysts covering the stock, 39% recommend a buy and the rest rate a hold. There are no sell ratings on the stock. Data from Bloomberg has analysts forecasting the stock gaining 29.8% to $14.59 in the upcoming 12 months.

1. CenturyLink ( CTL - Get Report), an integrated communications company, offers a suite of services including voice, Internet, data and video. Besides, it also provides fiber transport, wholesale communication services, competitive local exchange carrier services, security monitoring and other communications, and professional and business information services.

For the second quarter of 2011, the company reported operating revenue of $4.4 billion compared to $1.8 million in the year-ago quarter. Net income, excluding special items, stood at $262 million, while diluted earnings per share were 44 cents. Capital expenditure for the quarter grew 197% to $579 million, while free cash flow excluding special items jumped 256% to $950 million. Access lines at the end of the quarter increased 123% to 15.1 million, while high-speed internet customers swelled 137% to 5.4 million.

Recently, Savvis, a CenturyLink company, announced its cloud partnership agreement with Virgin Media ( VMED) business. The service will enable U.K. organizations to free themselves of traditional IT infrastructure constraints. Savvis has launched Savvis Symphony Database, a cloud-based database platform offering the advantages of cloud computing to Oracle and Microsoft SQL Server environments.

For 2011 third quarter, CenturyLink expects to earn total revenue of $4.55 billion to $4.60 billion, diluted earnings per share of $0.29 to $0.34 and operating cash flow of $1.88 billion to $1.92 billion, excluding the effect of all special items. For 2011, the company estimates operating revenue of $15.2 billion to $15.4 billion and operating cash flow to range from $6.5 billion to $6.7 billion. Diluted earnings per share are pegged at $1.6 to $1.7.

Of the 22 analysts covering the stock, 68% rate a buy and the rest suggest a hold. There are no sell ratings on the stock. A Bloomberg poll foresees the stock gaining an average 36.2% to $43.92 in the upcoming 12 months.

>>To see these stocks in action, visit the 5 Telecom Stocks With Upside portfolio on Stockpickr.