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Telecom ETFs in Focus on String of Q1 Earnings Beats

Sweta Jaiswal, FRM
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Although US-China trade tensions have kept investors on the edge, the telecom sector has been doing reasonably well so far this year. This shows in the 11.3% year-to-date gain of the S&P Telecom Select Industry Index. Moreover, with support from Trump’s government, 5G wireless network is likely to be a game changer in the telecom space, with complete deployment in 2020 (read: 5G ETFs: Invest in the Next Generation Wireless Technology).

Let’s take a look at some big telecom earnings releases and see if these can impact ETFs exposed to the space (read: Play Strong Earnings Beat With These Top-Ranked Sector ETFs).

Earnings in Focus

On Apr 23, Verizon Communications Inc. VZ reported first-quarter 2019 adjusted earnings of $1.20 per share compared with $1.17 in the year-earlier quarter. Earnings beat the Zacks Consensus Estimate by 3 cents. Consolidated GAAP revenues increased 1.1% year over year to $32.13 billion and missed the Zacks Consensus Estimate of $32.17 billion.

For 2019, Verizon has raised its earnings guidance on underlying strength of its business model and healthy wireless business momentum. Adjusted earnings per share are likely to increase low single digits compared to a relatively flat trajectory expected earlier. GAAP revenue expectations remain unchanged and are likely to increase low single-digit percentage rates on expected savings from tax reform and higher cash flow from operations. The stock has lost 3.24% since the earnings release (as of May 9). In spite of encouraging earnings results, the stock price slumped largely due to broader market tensions resulting from trade war woes.

On Apr 24, AT&T Inc. T reported strong first-quarter 2019 results driven by solid domestic wireless business, strength in postpaid phone net adds and incremental contribution from Mobility and WarnerMedia assets. Excluding non-recurring items, adjusted earnings in the quarter were 86 cents per share compared with 85 cents in the year-earlier quarter. The bottom line beat the Zacks Consensus Estimate by a penny. Quarterly consolidated revenues increased 17.8% year over year to $44,827 million. The top line, however, missed the Zacks Consensus Estimate of $45,093 million.

The company expects to maintain this healthy growth momentum in 2019, focusing on reducing its debt burden. At the same time, the company is well poised to benefit from the impending 5G boom, deploying mobile 5G services in select regions in 19 cities across the United States. The stock has lost 5.36% since reporting earnings (as of May 9).

On May 8, CenturyLink, Inc. CTL reported mixed first-quarter 2019 financial results, wherein the top line missed the Zacks Consensus Estimate but the bottom line surpassed the same. Net income (excluding integration and transformation costs, and special Items) came in at 34 cents per share compared with 25 cents in the prior-year quarter. The bottom line beat the Zacks Consensus Estimate by 7 cents. Quarterly operating revenues declined 5% year over year to $5,647 million. The top line lagged the consensus estimate of $5,728 million.

Owing to a good start in capturing synergy and cost transformation savings, CenturyLink has reiterated its 2019 financial outlook. It continues to expect adjusted EBITDA at $9.00-$9.20 billion. While free cash flow is estimated in the range of $3.10-$3.40 billion, free cash flow after dividends is projected between $2.025 billion and $2.325 billion. The stock has lost 4.99% since reporting earnings (as of May 9, 2019).

ETF Angle

In the current scenario, it is prudent to discuss the following ETFs that have relatively high exposure to the companies discussed.

Vanguard Telecommunication Services ETF VOX

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

It has AUM of $2.08 billion and charges 10 basis points as fees per year. It comprises 107 holdings, with the above-mentioned companies taking about 12.7% of the fund. The fund has gained 4.5% in a year and 17.7% year to date. VOX has a Zacks ETF Rank #1 (Strong Buy), with a Medium risk outlook (read: ETFs to Gain on Disney's Strong Earnings).

Fidelity MSCI Telecommunication Services ETF FCOM

This ETF provides exposure to the U.S. telecom space at a really low expense ratio.

It has AUM of $352.3 million and charges 8 basis points as fees per year. It holds about 105 securities in its basket, with the concerned companies having 12.9% weight in the fund. The fund has returned 18.9% in a year and 17.2% year to date. FCOM has a Zacks ETF Rank #1, with a Medium risk outlook (read: ETFs in Focus on Alphabet's Q1 Results).

iShares U.S. Telecommunications ETF IYZ

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

It has AUM of $463.2 million and charges 43 basis points as fees per year. It holds about 42 securities in its basket and puts about 30.5% weight in the in-focus companies. The fund has gained 6.6% in a year and 10.8% year to date. IYZ has a Zacks ETF Rank #2 (Buy), 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 $96.6 million and charges 35 basis points as fees per year. It holds about 43 securities in its basket and puts about 8.1% weight in the in-focus companies. The fund has lost 0.5% in a year but gained 12.1% year to date. 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
 
Fidelity MSCI Communication Services Index ETF (FCOM): ETF Research Reports
 
iShares U.S. Telecommunications ETF (IYZ): ETF Research Reports
 
SPDR S&P Telecom ETF (XTL): ETF Research Reports
 
Vanguard Communication Services ETF (VOX): ETF Research Reports
 
CenturyLink, Inc. (CTL) : Free Stock Analysis Report
 
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