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Telecom ETFs in Focus on Mixed Q3 Earnings Results

Sweta Jaiswal, FRM

The telecom sector has been maintaining decent returns so far this year. This is evident from the 9.5% year-to-date gain of the S&P Telecom Select Industry Index. The sector is gaining from the fifth-generation wireless technology or 5G, which will be a game changer when fully implemented. In fact, major telecom companies have started rolling out 5G service in limited areas (read: Top-Ranked ETFs That Crushed the Market in a Month). 

Let’s take a look at some big telecom earnings releases and if these can impact the ETFs exposed to the space.

Earnings in Focus

On Oct 25, Verizon Communications Inc. VZ reported third-quarter 2019 adjusted earnings of $1.25 per share compared with $1.22 in the year-earlier quarter. Earnings beat the Zacks Consensus Estimate by a penny. Consolidated GAAP revenues rose 0.9% year over year to $32.89 billion and beat the Zacks Consensus Estimate of $32.72 billion.

For 2019, Verizon reiterated its earlier guidance on underlying strength of its business model and healthy momentum in its wireless business. Adjusted earnings per share are likely to increase low single digits, while GAAP revenues are expected to increase low single-digit percentage rates on expected savings from tax reform and higher cash flow from operations. Capital expenditures for 2019 are projected in the range of $17 billion to $18 billion. As of Nov 12, the stock lost around 2.1% since the earnings release.

On Oct 28, AT&T Inc. T reported relatively tepid third-quarter 2019 results with a year-over-year decline in GAAP earnings and revenues due to lower-than-anticipated performance by legacy wireline services and WarnerMedia businesses. Excluding non-recurring items, adjusted earnings in the quarter were 94 cents per share compared with 90 cents a year ago. The bottom line exceeded the Zacks Consensus Estimate by a penny. Quarterly GAAP operating revenues declined 2.5% year over year to $44.59 billion. The top line missed the Zacks Consensus Estimate of $45.01 billion.

Management has issued a healthy guidance for 2020 and expects adjusted earnings in the range of $3.60 to $3.70 per share on revenue growth of 1-2%. Free cash flow is expected to be stable at $28 billion with non-core asset monetization of $5-$10 billion. Adjusted EBITDA margin is expected to remain steady compared with 2019 levels. As of Nov 12, the stock gained 6.1% since the earnings release.

On Nov 6, CenturyLink, Inc. CTL reported mixed third-quarter 2019 results, wherein the top line beat the Zacks Consensus Estimate but the bottom line lagged the same. Net income (excluding integration and transformation costs, and special items) came in at $328 million or 31 cents per share compared with $327 million or 30 cents a year ago. The bottom line, however, missed the Zacks Consensus Estimate by a penny. Quarterly operating revenues declined 3.6% year over year to $5.61 billion. The top line beat the consensus estimate of $5.55 billion.

CenturyLink reiterated its financial targets for 2019. It continues to expect adjusted EBITDA of $9.00-$9.20 billion. While free cash flow is expected in the range of $3.10-$3.40 billion, free cash flow after dividends is projected between $2.005 billion and $2.305 billion. As of Nov 12, the stock gained 9.4% since the earnings release.

ETF Angle

In the current scenario, let’s discuss ETFs that have relatively high exposure to the companies discussed.

iShares U.S. Telecommunications ETF IYZ

This ETF provides exposure to the U.S. telecom industry.

It has AUM of $375.7 million and charges 42 basis points as fees per year. It holds about 41 securities in its basket and puts about 50.5% weight in the in-focus companies. IYZ has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook.

Vanguard Communication Services ETF VOX

This ETF is one of the most popular funds in the communication services space.

It has AUM of $2.21 billion and charges 10 basis points as fees per year. It comprises 113 holdings, with the above-mentioned companies taking about 13.3% of the fund. VOX has a Zacks ETF Rank #3 with a Medium risk outlook (read: ETFs Set to Surge on Facebook's Q3 Earnings Beat).

Fidelity MSCI Communication Services ETF FCOM

This ETF provides exposure to the communication services sector in the U.S. equity market at a really low expense ratio.

It has AUM of $458.9 million and charges 8 basis points as fees per year. It holds about 109 securities in its basket, with the concerned companies having 13.1% weight in the fund. FCOM has a Zacks ETF Rank #3, with a Medium risk outlook.

SPDR S&P Telecom ETF XTL

This fund tracks the S&P Telecom Select Industry Index.

It has AUM of $50.1 million and charges 35 basis points as fees per year. It holds about 41 securities in its basket and puts about 9.8% weight in the in-focus companies. XTL has a Zacks ETF Rank #3, with a Medium risk outlook.

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AT&T Inc. (T) : Free Stock Analysis Report
 
Verizon Communications Inc. (VZ) : Free Stock Analysis Report
 
Fidelity MSCI Communication Services Index ETF (FCOM): ETF Research Reports
 
iShares U.S. Telecommunications ETF (IYZ): ETF Research Reports
 
Vanguard Communication Services ETF (VOX): ETF Research Reports
 
SPDR S&P Telecom ETF (XTL): ETF Research Reports
 
CenturyLink, Inc. (CTL) : Free Stock Analysis Report
 
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