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Can Telecom ETFs Gain Despite Mixed Q3 Earnings?

Sweta Jaiswal, FRM
·5 min read

The coronavirus crisis has not spared the telecom sector. Firms within the sector had to incur higher costs associated with bad debt, production shutdowns and expenses related to retail store closures, leading to lower equipment sales and advertising revenues. Players in the sector are trying to redefine business plans to optimize efficiencies and operations and to lower costs while supporting employees and customers with several financial packages.

However, the firms have come together to manage the increase in data traffic. The companies are also preparing their fiber optic networks to support 4G LTE and 5G wireless standards as well as wireline connections. Going on, the introduction of 5G smartphones is likely to encourage telecom operators to make 5G network more pervasive. This in turn can lead to infrastructure upgrade along with increased numbers of wireless spectrum expected to be made available by the government.

Let’s take a look at some big telecom earnings releases and see if these can impact the ETFs exposed to the space.

Earnings in Focus

On Oct 22, AT&T Inc. (T) reported relatively decent third-quarter 2020 results with revenues beating the Zacks Consensus Estimate but adjusted earnings lagging the same. Excluding non-recurring items, adjusted earnings in the quarter were 76 cents per share compared with 94 cents a year ago. The bottom line lagged the Zacks Consensus Estimate by a penny. Quarterly GAAP operating revenues slid 5% year over year to $42.34 billion and beat the Zacks Consensus Estimate of $41.56 billion.

For 2020, the company expects free cash flow at around $26 billion with a dividend payout at the high 50% bracket.

On Oct 21, Verizon Communications Inc. (VZ) reported third-quarter 2020 adjusted earnings of $1.25 per share, remaining flat in comparison to the year-ago quarter. Earnings surpassed the Zacks Consensus Estimate by 3 cents. Quarterly aggregate operating revenues slid 4.1% year over year to $31.54 billion. The metric also lagged the Zacks Consensus Estimate of $31.57 billion.

For 2020, Verizon updated its guidance for 2020 based on the resilient earnings performance and expected trends. The company currently expects adjusted earnings per share growth between 0% and 2%, up from the earlier projection of -2% to 2%. Capital expenditure for 2020 is likely to be at the high end of its previously-guided $17.5-$18.5 billion.

On Nov 4, Lumen Technologies (LUMN) reported decent third-quarter 2020 results, with the top and the bottom line surpassing the Zacks Consensus Estimate. Net income (excluding integration and transformation costs, and special items) came in at $430 million or 40 cents per share compared with $328 million or 31 cents per share a year ago. The bottom line surpassed the Zacks Consensus Estimate by 9 cents. Quarterly total operating revenues dropped 3.4% year over year to $5.17 billion. The top line outpaced the consensus estimate of $5.15 billion.

Lumen has withdrawn its 2020 financial outlook for adjusted EBITDA, free cash flow and capital expenditures largely due to uncertainties surrounding the coronavirus pandemic. However, the company expects net cash interest in the range of $1.62-$1.65 billion, down from the prior guidance of $1.65-$1.70 billion. Depreciation and amortization outlook remained unchanged at the range of $4.7-$4.9 billion. The effective income tax rate, too, remained unchanged at around 28%.

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. companies that provide telephone and internet products, services, and technologies. It has AUM of $375.3 million and charges 42 basis points as fees per year. It holds about 45 securities in its basket and puts about 46.6% weight in the in-focus companies. IYZ has a Zacks ETF Rank #2 (Buy), with a Medium-risk outlook (read: Verizon to Buy Tracfone: ETFs in Focus).

Vanguard Communication Services ETF VOX

This ETF is one of the most popular funds in the communication services space. It has AUM of $2.96 billion and charges 10 basis points as fees per year. It comprises 112 holdings, with the above-mentioned companies taking about 10.5% of the fund. VOX has a Zacks ETF Rank #2, with a Medium-risk outlook (read: Will Google ETFs Keep Shining on Q3 Earnings Optimism?).

Fidelity MSCI Communication Services Index 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 $591.4 million and charges 8 basis points as fees per year. It holds about 105 securities in its basket, with the above-mentioned companies taking about 9.3% weight in the fund. FCOM has a Zacks ETF Rank #2, with a Medium-risk outlook (read: ETFs to Soar on Robust Facebook Q3 Earnings).

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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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