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Telecom ETFs in Focus on Mixed Q2 Earnings Results

Sweta Jaiswal, FRM

The telecom sector has been maintaining a streak of decent returns so far this year. This shows in the 7.5% 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: Best ETFs to Invest in 5G Theme). 

Let’s take a look at some big telecom earnings releases and see if these can impact the ETFs exposed to the space (read: 5 Sector ETFs That Crushed the Market in July).

Earnings in Focus

On Aug 1, Verizon Communications Inc. VZ reported second-quarter 2019 adjusted earnings of $1.23 per share compared with $1.20 in the year-earlier quarter. Earnings outpaced the Zacks Consensus Estimate by 3 cents. Consolidated GAAP revenues declined 0.4% year over year to $32.07 billion and lagged the Zacks Consensus Estimate of $32.40 billion.

For 2019, Verizon reaffirmed its guidance. Adjusted earnings per share are likely to increase low single digits, while GAAP revenues are expected to rise 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. The stock has gained around 1% since the earnings release (as of Aug 8).

On Jul 24, AT&T Inc. T reported mixed second-quarter 2019 results as higher operating expenses led to a year-over-year decline in earnings despite decent top-line growth backed by strength in domestic wireless business and incremental contribution from WarnerMedia assets. Excluding non-recurring items, adjusted earnings in the quarter were 89 cents per share compared with 91 cents a year ago. The bottom line was in line with the Zacks Consensus Estimate. Quarterly GAAP operating revenues rose 15.3% year over year to $44.957 billion. The top line, however, marginally missed the Zacks Consensus Estimate of $44.963 billion.

AT&T is in a position to maintain healthy growth momentum on strength in the Wireless business and incremental contribution from WarnerMedia assets. The company currently expects free cash flow of $28 billion in 2019 with low single-digit adjusted earnings per share growth and dividend payout ratio of around 50%. The stock has gained 7.6% since the earnings release (as of Aug 8).

On Aug 7, CenturyLink, Inc. CTL reported mixed second-quarter 2019 financial results, wherein the top line lagged the Zacks Consensus Estimate but the bottom line beat the same. Net income (excluding integration and transformation costs, and special items) came in at $369 million or 34 cents per share compared with $282 million or 26 cents a year ago. The bottom line surpassed the Zacks Consensus Estimate by 3 cents. Quarterly operating revenues declined 5.5% year over year to $5.58 billion. The top line missed the consensus estimate of $5.63 billion.

CenturyLink has reaffirmed its 2019 outlook for adjusted EBITDA and free cash flow. 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. The stock has lost 7.6% since the earnings release (as of Aug 8).

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 $442.1 million and charges 42 basis points as fees per year. It holds about 42 securities in its basket and puts about 31.2% weight in the in-focus companies. IYZ has a Zacks ETF Rank #2 (Buy) with a Medium risk outlook (read: ETFs in Focus on Cisco's Acacia Buyout Deal).

Vanguard Communication Services ETF VOX

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

It has AUM of $1.98 billion and charges 10 basis points as fees per year. It comprises 114 holdings, with the above-mentioned companies taking about 12.97% of the fund. VOX has a Zacks ETF Rank #2 with a Medium risk outlook (read: Antitrust Probe Likely to Hit These Tech ETFs).

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 $360.5 million and charges 8 basis points as fees per year. It holds about 108 securities in its basket, with the concerned companies having 10.1% weight in the fund. FCOM has a Zacks ETF Rank #2, with a Medium risk outlook (read: Alphabet Soars on Q2 Results: ETFs to Benefit).

SPDR S&P Telecom ETF XTL

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

It has AUM of $53.3 million and charges 35 basis points as fees per year. It holds about 41 securities in its basket and puts about 9.2% weight in the in-focus companies. XTL has a Zacks ETF Rank #3 (Hold), 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
 
Vanguard Communication Services ETF (VOX): ETF Research Reports
 
SPDR S&P Telecom ETF (XTL): ETF Research Reports
 
iShares U.S. Telecommunications ETF (IYZ): ETF Research Reports
 
Fidelity MSCI Communication Services Index ETF (FCOM): ETF Research Reports
 
CenturyLink, Inc. (CTL) : Free Stock Analysis Report
 
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