Yesterday, AT&T ((T) released it 1Q14 numbers with earnings and revenues beating the Zacks Consensus Estimate, though by a slight margin. Though the company dished out record first-quarter post-paid growth in five years, subdued performance in some key metrics dampened investors’ mood (read: The Comprehensive Guide to Telecom ETFs).
Q1 Earnings in Focus
The company reported adjusted earnings of 71 cents per share, up 10.9% from the year-ago quarter and a penny ahead of the Zacks Consensus Estimate. Record revenue growth in more than two years and efficient cost management were the earnings drivers.
Revenues grew 3.6% year over year to $32.5 billion and exceeded the Zacks Consensus Estimate of $32.4 billion. Notably, this was the company’s best growth in more than two years. Addition of a solid level of net wireless subscribers led to this growth. The revenue guidance was also an optimistic one as the company lifted its full-year growth forecast to at least 4% from 3% to account for the acquisition of LEAP wireless in March.
However, investors might have demanded more from the second highest U.S. mobile services provider as AT&T slipped into red (down 2.01%) in afterhours trading. Actually, the telecom giant has scored weakly on some metrics. In spite of subscriber addition, phone-only average revenue per user nudged up only 0.4% from the year-ago quarter. Many analysts noted that the service revenue growth was feeble due to the re-pricing of 11 million subscribers at lower average revenue per user (read: Mixed AT&T Earnings Put These Telecom ETFs in Focus).
Though AT&T dipped in recent trading, this dip might open up a buying opportunity as the long-term outlook for AT&T seems bright. Its bullish Zacks Industry Rank in the top 15% also affirms this fact.
AT&T has a sizable exposure (at least 14%) in telecom and technology funds like Vanguard Telecommunication Services ETF (VOX), Fidelity MSCI Telecommunication Services Index ETF (FCOM) and iShares Global Telecom ETF (IXP). This suggests that the performance of the fund is highly dependent on AT&T (see: all the Telecom ETFs here). Below, we have highlighted some of these funds in detail.
Vanguard Telecommunication Services ETF (VOX)
VOX, a reasonably popular telecom ETF, tracks the MSCI U.S. Investable Market Telecommunication Services 25/50 Index and holds 31 stocks in its basket. The stock-under-review, AT&T, occupies the top position in the basket with 24.4% of assets.
Generally, when one stock accounts for as much as 24% of an ETF's weight, its individual performance decides a lot of the fund’s price movement. VOX has company-specific concentration risk putting more than 70% of investments in its top 10 holdings.
About three-fifths of the portfolio is skewed toward integrated telecom services, followed by wireless and alternative carriers. The product has amassed $673.2 million in its asset base and charges 14 bps in annual fees.
VOX gained about 2.40% in the past week.
Fidelity MSCI Telecommunication Services Index ETF (FCOM)
This fund follows the MSCI USA IMI Telecommunication Services 25/50 Index, holding 31 stocks in its basket. AT&T takes the top spot at 25.02%. From a sector perspective, diversified telecom services make up for 74% of assets.
The ETF is unpopular with just $20.9 million in AUM while its expense ratio came in at 0.12%. The fund was up over 2.94% in the past one month.
iShares Global Telecom ETF (IXP)
This is one of the most popular ETFs in the communication equities ETF space with about $481.1 million in assets. The product tracks the S&P Global Telecommunications Sector Index and charges 48 bps in fees and expenses.
In focus AT&T takes the second spot in its 32-security basket with a 14.93% share. In terms of industrial exposure, diversified telecom accounts for 75.0% of the total while wireless telecom takes the rest. IXP is up 2.39% last week.
Having said this, we would like to note that investors should play cautiously with the afore-mentioned ETFs. Both VOX and IXP have a Zacks ETF Rank of 4 or ‘Sell’ rating with a ‘Medium’ risk outlook. Overvaluation might have caused the funds to fall within the bearish zone.
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