Telecom ETFs in Focus as AT&T and Sprint Beat Estimates

Four of the largest U.S. operators in the telecommunications industry, which has seen unprecedented growth in high-speed mobile Internet traffic, in particular for wireless data and video, have just come out with their earnings results for the first quarter of 2014.

While some managed to comfortably beat both top and bottom-line estimates, others reported mixed results and one company failed to perform as per expectations. Below we have highlighted in greater detail about the earnings of these telecom operators:

The largest U.S. carrier, Verizon Communications Inc. (VZ), reported mixed first quarter results. While the company managed to beat the Zacks Consensus Estimate for revenue, it missed our earnings targets. Although the company’s adjusted earnings jumped 23.5% year over year to 84 cents per share, it missed our estimates by 3 cents.

The sharp jump in profits was primarily due to the sale of Verizon's minority interest in Vodafone Omnitel. Moreover, strong revenue contribution from wireless services, improvement in wireless operating margins and increased demand for FiOS services helped in boosting the company’s top-line growth.

However, the company’s wireless subscriber figures were discouraging. The company added 539,000 net postpaid connections, a roughly 20% fall over the previous year. Moreover, this was 13.4% lower than the number of postpaid connections added by its competitor AT&T.

Nonetheless, Verizon reiterated its outlook for the year, expecting a 4% boost in its top line (read: The Comprehensive Guide to Telecom ETFs).

Rival AT&T Inc. (T), however, managed to beat both our revenue and earnings estimates. The company reported record first first-quarter post-paid growth in five years. Notwithstanding the strong growth in postpaid connections, phone-only average revenue per user nudged up only 0.4% from the year-ago quarter.

The company lifted its full-year growth forecast to at least 4% from 3% to account for the acquisition of LEAP wireless in March.

Sprint Corporation (S) followed AT&T’s footsteps and beat our estimates on both fronts. The company reported a loss of 4 cents per share, narrower than the Zacks Consensus Estimate of a loss of 6 cents.

In spite of the company reporting a loss this quarter, what cheered the investors most was the 80.9% drop in the company’s loss per share from the year-ago quarter (read: 3 Low Beta ETFs for This Volatile Market).

However, the number two telecom carrier lost approximately 383,000 subscribers in the reported quarter, of which 231,000 were net postpaid subscribers. Nonetheless, increased network efficiency brought about by the iDEN shutdown and the 4G LTE build-out, along with a promising response to Sprint’s recently launched ‘Framily’ plans, enabled the company to smartly expand its EBITDA margins.

T- Mobile US, Inc. (TMUS), however, missed our estimates on both earnings and revenues. Still, the company added a record number of customers during the reported quarter, which was more than the combined addition of its top three rivals.

This along with better-than-expected subscriber addition renewed speculation about a potential merger between the company and Sprint, leading T-Mobile’s share prices to jump roughly 8% in the past two days.

Deals in the Cards?

Sprint, the third largest wireless carrier, is believed to be in talks to acquire T-Mobile – the fourth largest mobile carrier according to a Bloomberg report. Sprint is meeting with various banks to arrange for funds in order to pursue a takeover and is expected to make a formal bid in June or July this year. T-Mobile US has a market cap of $23.5 billion.

AT&T is believed to have approached satellite TV company, DirecTV, to acquire the latter, according to a Reuters report. The deal, if sealed, is expected to be worth at least $40 billion, DirecTV's current market capitalization.

Market Reaction

Given the mixed results from the largest telecom company and an earnings beat from the second and the third largest companies in the space, Telecom ETFs having exposure to these equities have seen a surge of more than 2% in the last 5 trading sessions. Moreover, talks about a likely deal between Sprint and T-Mobile might also keep up the action in the Telecom ETF space in the upcoming days.

Thus investors should closely watch the below mentioned Telecom ETFs for any surge in their prices (see all Telecommunication ETFs here).

Fidelity MSCI Telecommunication Service ETF (FCOM)

Launched in October 2013, the fund tracks the MSCI USA IMI Telecommunication Services 25/50 Index, managing a small asset base of $20.3 million.

The fund has a huge exposure to AT&T Inc. and Verizon – which are the fund’s top two holdings and together form roughly 48% of fund assets. Moreover, Sprint and T-Mobile have approximately 3% allocation each in the fund (read: 3 ETFs Hitting All-time Highs in Rocky Market).

iShares U.S. Telecommunications ETF (IYZ)

The fund provides exposure to companies from the telephone and Internet products, services, and technologies by holding a small basket of 24 stocks. AT&T Inc. and Verizon occupy the top two spots in the fund, having more than 8% exposure each. Sprint and T-Mobile are also among the top ten holdings together occupying roughly 10% of fund assets.

Vanguard Telecommunication Services ETF (VOX)

The fund is heavily concentrated among its top ten holdings, which together have 73% allocation in the fund. AT&T Inc. (24.4%) and Verizon (23.6%) occupy the top two spots here too with Sprint and T-Mobile having 3.4% and 3.2% allocation in the fund, respectively.

Bottom Line

Though the above mentioned ETFs have seen a surge in their prices following the earnings release from some of its top holdings, together with some deals on the cards, investors should play cautiously with these ETFs. Both IYZ and VOX have a Zacks ETF Rank of 4 or ‘Sell’ rating with a ‘Medium’ risk outlook, so while the short term might be promising, there is definitely some choppiness to consider for the long haul in this space.

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