Can Telecom ETFs Gain on Mixed Q4 Earnings Results?

Sweta Jaiswal, FRM

The telecom sector maintained decent returns in 2019 as is evident from the 5.4% gain of the S&P Telecom Select Industry Index. The sector has maintained gains on the fifth-generation wireless technology or 5G, which will be a game changer when fully implemented. Moreover, 5G is likely to enhance the scalability, security and universal mobility of the telecommunications industry, which is projected to drive proliferation of IoT. In fact, major telecom companies have started rolling out 5G service in limited areas (read: Will Virus Infect Q1 Earnings? Multi-Asset ETFs to Play).

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 Jan 30, Verizon Communications Inc. VZ reported fourth-quarter 2019 adjusted earnings of $1.13 per share compared with $1.12 a year earlier. Earnings lagged the Zacks Consensus Estimate by a couple of cents. Consolidated GAAP operating revenues rose 1.4% year over year to $34.78 billion and surpassed the Zacks Consensus Estimate of $34.52 billion.

For 2020, Verizon issued guidance based on underlying strength in its business model and healthy momentum in wireless business. Adjusted earnings per share are likely to increase 2-4% year over year, while GAAP revenues are expected to rise by low-to-mid single-digit percentage rates driven by expected savings from tax reform and higher cash flow from operations. Capital expenditures for 2020 are estimated in the range of $17-$18 billion.

On Jan 29, AT&T Inc. T reported healthy fourth-quarter results, with solid cash flow and adjusted earnings. Excluding non-recurring items, adjusted earnings in the quarter were 89 cents per share compared with 86 cents a year ago. The bottom line beat the Zacks Consensus Estimate by a penny. Quarterly GAAP operating revenues declined 2.4% year over year to $46.82 billion and lagged the Zacks Consensus Estimate of $46.90 billion.

Management reiterated its guidance for 2020 adjusted earnings at 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 likely to remain steady compared with 2019 levels.

On Feb 12, CenturyLink, Inc. CTL reported decent fourth-quarter 2019 results, wherein the top line beat the Zacks Consensus Estimate. Net income (excluding integration and transformation costs, and special items) came in at $352 million or 33 cents per share compared with $394 million or 37 cents a year ago. The bottom line, was in line with the Zacks Consensus Estimate. Quarterly aggregate operating revenues dropped 3.6% year over year to $5.57 billion. The top line beat the consensus estimate of $5.54 billion.

CenturyLink has provided its financial targets for 2020. It expects adjusted EBITDA of $9.0-$9.2 billion. While free cash flow is expected in the range of $3.1-$3.4 billion, net cash interest is estimated between $1.75 billion and $1.80 billion. 

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 $386.1 million and charges 42 basis points as fees per year. It holds about 41 securities in its basket and puts about 46.4% weight in the in-focus companies. It has gained 1.1% since Jan 29 (as on Feb 13). IYZ has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook (read: 6 Trade-Proof Sector ETFs to Follow if No Deal is Cracked).

Vanguard Communication Services ETF VOX

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

It has AUM of $2.34 billion and charges 10 basis points as fees per year. It comprises 114 holdings, with AT&T and Verizon Communications together taking about 12.3% of the fund. It has gained 2.6% since Jan 29 (as on Feb 13). VOX has a Zacks ETF Rank #3 with a Medium risk outlook (read: Google ETFs Gain Despite Mixed earnings).

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 $524.9 million and charges 8 basis points as fees per year. It holds about 106 securities in its basket, with the concerned companies having 12% weight in the fund. It has gained 2.7% since Jan 29 (as on Feb 13). FCOM 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
 
CenturyLink, Inc. (CTL) : Free Stock Analysis Report
 
iShares U.S. Telecommunications ETF (IYZ): ETF Research Reports
 
Vanguard Communication Services ETF (VOX): ETF Research Reports
 
Fidelity MSCI Communication Services Index ETF (FCOM): ETF Research Reports
 
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