Telecom ETFs In Red Following Mixed Earnings

The telecom industry has been in the news lately thanks to several merger and acquisition deals. Consolidation between the telecom and media sectors received a major boost with the AT&T Inc. (NYSE:T) and Time Warner Inc. (NYSE:TWX) deal.

This apart, the year has been rather mediocre for the telecom industry marked by lukewarm results amid turbulent economic conditions. The industry has evolved as an intensely contested space where success depends largely on technical superiority, quality of services and scalability. Several tech giants like Alphabet (NASDAQ:GOOGL), Facebook (NASDAQ:FB) and Amazon (NASDAQ:AMZN) are entering the telecom-media space. Cut-throat pricing competition has put pressure on margins this earnings season.

However, mixed results and global market concerns notwithstanding, telecommunications is one of the few industries to have managed to undergo rapid technological improvement even during depression. In this era of digitization and technology, the ever-growing demand for technologically superior products should see the sector through.

Below we have highlighted in greater detail earnings of some of the major telecom companies, which really back this sector’s outlook. (Read: 5 Sector ETFs to Play Now).

Telecom Earnings in Details

U.S. telecom behemoth AT&T Inc. failed to impress in the reported quarter with the top line missing expectations and the bottom line coming in line with the same. Adjusted earnings per share of 74 cents were in line the Zacks Consensus Estimate. Quarterly total revenue increased 4.6% year over year to $40,890 million, missing the Zacks Consensus Estimate of $41,095 million. AT&T is set to acquire media giant Time Warner in a deal worth $85.4 billion. The company expects to achieve cost synergies of $1 billion per annum within the first three years of the merger. (read: Acquisition Talks Boost Time Warner; Hit AT&T: ETFs in Focus).

Similarly, U.S. telecom giant Verizon Communications Inc. (NYSE:VZ) also reported mixed financial results wherein the top line lagged the Zacks Consensus Estimate, while the bottom line beat the same by a slight margin. Verizon’s adjusted earnings per share were down almost 2.9% year over year to $1.01 but came ahead of the Zacks Consensus Estimate of 99 cents. Quarterly revenue fell 6.7% year over year to $30,937 million, but missed the Zacks Consensus Estimate of $31,141 million. Keeping up with the trend, Verizon took over AOL to target the lucrative online advertising market and is set to acquire Yahoo (NASDAQ:YHOO) to gain exposure to online content.

CenturyLink Inc (NYSE:CTL).’s (NYSE:T) third-quarter 2016 adjusted earnings per share of 56 cents surpassed the Zacks Consensus Estimate of 55 cents but were down 20% year over year. Quarterly total revenue of $4,382 million fell 3.8% from the prior-year quarter and was slightly ahead of the Zacks Consensus Estimate of $4,381 million. Acquisitions are rife in the telecom industry. CenturyLink has agreed to purchase Level 3 Communications Inc. (NYSE:T) for $24 billion. The deal is expected to close by the end of the third quarter of 2017.

ETFs in Focus

Thanks to mixed results, telecom ETFs with considerable exposure to the three stocks above were all in the red in the last 10 trading sessions (as of November 7, 2016). Below we discuss four of these that will be in focus in the coming days (see all Telecommunication ETFs here).

iShares U.S. Telecommunications ETF IYZ

IYZ tracks the Dow Jones U.S. Select Telecommunications Index. The fund manages assets worth nearly $471.8 million and has an average trading volume of roughly 615,000 shares a day. The fund charges an expense ratio of 44 basis points a year.

The fund holds 22 stocks and has more than one-fifth of its assets in the top 2 holdings while the others have less than 6.6% exposure. Among individual holdings, top stocks in the ETF include AT&T, Verizon and CenturyLink with asset allocation of 8.1%, 7.8% and 5.1%, respectively. The three major sectors of this ETF are Integrated Telecom, Wireless Telecom and Alternative Carriers with asset holdings of 50.5%, 31.3% and 18.1%, respectively. The product lost 5.8% in the past 10 days and currently has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook.

Fidelity MSCI Telecom Services ETF FCOM

This ETF tracks the performance of the MSCI USA IMI (LON:IMI) Telecommunication Services 25/50 Index. The fund manages assets worth nearly $141.8 million and has an average trading volume of roughly 40,000 shares a day. The fund charges an expense ratio of 8.4 basis points a year.

The fund holds 31 stocks and has a concentrated approach in the top 10 holdings with 68.9% of the asset base invested in them. Among individual holdings, AT&T, Verizon and CenturyLink are among the top three with asset allocation of 21.5%, 21.4% and 3.5%, respectively. Diversified Telecommunication Services and Wireless Telecommunication Services are the two major sectors of this ETF with asset holdings of 82.4% and 17.5%, respectively. The product lost 3.3% in the past 10 days and currently has a Zacks ETF Rank #3 with a Medium risk outlook (read: Stocks & ETFs Likely to Soar on First Presidential Debate).

iShares Global Telecommunications ETF IXP

This ETF tracks the S&P Global 1200 Telecommunications Services Sector Index. The fund has nearly $320.9 million of assets under management and an average trading volume of roughly 33,000 shares a day. The fund charges an expense ratio of 47 basis points a year.

The fund holds 33 stocks in its portfolio and has a concentrated approach in the top 10 holdings with approximately 71.2% of the asset base invested in them. Among individual holdings, top stocks in the ETF include AT&T and Verizon with asset allocation of 18.8% and 16.1%, respectively. CenturyLink holds weight of 1.1%. Integrated Telecommunication, Wireless Telecommunication and Alternative Carriers are the three major sectors with asset holdings of 72.7%, 25.8% and 1.3%, respectively. It fell almost 1.4% in the last 10 days and currently has a Zacks ETF Rank #3 with a Medium risk outlook.

Vanguard Telecommunication Services ETF (MU:VOX)

This ETF seeks to track the performance corresponding to the benchmark MSCI US Investable Market Telecommunication Services 25/50 Index. It has assets under management of nearly $1.3 billion and an average trading volume of roughly 189,000 shares a day. The fund charges an expense ratio of 10 basis points a year.

The fund holds 30 stocks in its portfolio and has a concentrated approach in the top 10 holdings with 69.5% of the asset base invested in them. Among individual holdings, top stocks in the ETF are AT&T and Verizon with a combined share of almost 45%. CenturyLink has the fifth highest share with 3.9% weight. Integrated Telecommunication Services, Alternative Carriers and Wireless Telecommunication Services are the three major sectors with asset holdings of 66.1%, 18.3% and 15.4%, respectively. The fund lost 3.1% in the last 10 days and currently has a Zacks ETF Rank #3 with a Medium risk outlook.

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