How Will Telecom ETFs React to Mixed Q1 Earnings?

Like all other sectors, the telecom sector has been impacted by the coronavirus crisis. The telecom firms 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. Also, companies are being forced to redraw their distribution channels for changing customer demand and preferences. The players in the sector are also 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.

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

Earnings in Focus

On Apr 24, Verizon Communications Inc. VZ reported first-quarter 2020 adjusted earnings of $1.26 per share compared with $1.20 a year earlier. Earnings surpassed the Zacks Consensus Estimate by 4 cents. Consolidated GAAP operating revenues slid 1.6% year over year to $31.61 billion and missed the Zacks Consensus Estimate of $32.35 billion.

For 2020, Verizon tweaked its guidance considering the coronavirus crisis. Adjusted earnings per share are currently anticipated to be within -2% and 2%, compared with earlier expectations of a 2-4% increase year over year. The company, however, withdrew its revenues guidance. Capital expenditures for 2020 are estimated in the range of $17.5 billion to $18.5 billion. Verizon’s shares have lost around 1% since the earnings release (as of May 8).

On Apr 22, AT&T Inc. T reported modest first-quarter 2020 results as the outbreak dented revenue growth. Excluding non-recurring items, adjusted earnings in the quarter were 84 cents per share compared with 86 cents a year ago. The bottom line was at par with the Zacks Consensus Estimate. Quarterly GAAP operating revenues declined 4.6% year over year to $42.78 billion and lagged the Zacks Consensus Estimate of $44.21 billion.

AT&T decided to cancel its stock buyback program in wake of the pandemic. The evolving nature of the contagious disease and its impact on the economy forced management to reconsider the buyback plan. Management has also withdrawn its guidance due to its inability to fathom the impact of the outbreak on business. The company’s shares have lost around 0.3% since the earnings release (as of May 8).

On May 6, CenturyLink, Inc. CTL reported mixed first-quarter 2020 results, with the bottom line beating the Zacks Consensus Estimate and the top line missing the same. Net income (excluding integration and transformation costs, and special items) came in at $399 million or 37 cents per share compared with $360 million or 34 cents per share a year ago. The bottom line surpassed the Zacks Consensus Estimate by a penny. Quarterly aggregate operating revenues dropped 3.7% year over year to $5.23 billion. The top line missed the consensus estimate of $5.48 billion.

CenturyLink has withdrawn its 2020 financial outlook for adjusted EBITDA, free cash flow and capital expenditures due to uncertainties related to COVID-19. However, it continues to estimate net cash interest between $1.75 billion and $1.80 billion. Depreciation and amortization are expected in the range of $4.7-$4.9 billion. The effective income tax rate is likely to be around 28%. The company’s shares have gained around 0.6% since the earnings release.

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 $358.5 million and charges 42 basis points as fees per year. It holds about 39 securities in its basket and puts about 43.7% weight in the in-focus companies. IYZ has a Zacks ETF Rank #3 (Hold), with a Medium-risk outlook.

Vanguard Communication Services ETF VOX

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

It has AUM of $2.05 billion and charges 10 basis points as fees per year. It comprises 112 holdings, with AT&T and Verizon Communications together taking about 13% of the fund. VOX has a Zacks ETF Rank #3, with a Medium-risk outlook (read: Google ETFs Gain Despite Mixed Earnings Amid Coronavirus Crisis).

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 $462.2 million and charges 8 basis points as fees per year. It holds about 104 securities in its basket, with AT&T and Verizon Communications having 11.6% weight in the fund. FCOM has a Zacks ETF Rank #3, with a Medium-risk outlook (read: Facebook Soars Post Q1 Earnings: ETFs in Focus).

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ATT Inc (T) : Free Stock Analysis Report
 
Verizon Communications Inc (VZ) : Free Stock Analysis Report
 
CenturyLink Inc (CTL) : Free Stock Analysis Report
 
iShares US 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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