Telecom ETFs To Watch After Lukewarm Earnings

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Includes: FCOM, IXP, IYZ, VOX
by: Zacks Funds

This year has been rather mediocre for the telecom industry, with lukewarm results coming up amid turbulent economic conditions. The industry has emerged as an intensely contested space, where success depends largely on technical superiority, quality of services and scalability. Cut-throat pricing competition has put pressure on margins this earnings season.

However, mixed results and global market concerns notwithstanding, the overall sentiment for the U.S. telecommunications industry in 2016 is positive. 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.

Quite expectedly, investors will keep an eye on telecom earnings for the rest of this season to assess industry dynamics and future growth prospects, with several big names like T-Mobile US, Inc. (NASDAQ:TMUS), Dish Network Corp. (NASDAQ:DISH) and Cincinnati Bell Inc. (NYSE:CBB) yet to report.

Telecom Earnings in Details

U.S. telecom behemoth Verizon Communications Inc. (NYSE:VZ) reported impressive results, beating on both the top and the bottom line. Adjusted earnings per share of 89 cents beat the Zacks Consensus Estimate by a penny and year-ago earnings of 71 cents. Quarterly total revenue increased 3.2% year over year to $34,254 million, outpacing the Zacks Consensus Estimate of $34,132 million. Apart from earnings, the company was also in the news because of other developments. According to a recent Bloomberg report, Verizon has assigned its chief executive officer of its AOL unit, Tim Armstrong, a key role, exploring options to bid for the core assets of tech giant Yahoo Inc. (NASDAQ:YHOO). However, neither company has confirmed the news as yet. Verizon has gained 11.2% since reporting earnings (as of February 11, 2016).

In contrast U.S. telecom giant AT&T Inc. (NYSE:T) reported weak financial results, wherein both the top and bottom line lagged the Zacks Consensus Estimate. AT&T's adjusted earnings per share moved up 14.5% year over year to 63 cents, missing the Zacks Consensus Estimate by a penny. Quarterly revenue increased 22.3% year over year to $42,119 million, but missed the Zacks Consensus Estimate of $42,781 million. AT&T's weaker-than-expected earnings were primarily attributable to disappointing postpaid wireless subscriber addition of 526,000, down a significant 38.4% year over year. The stock has gained 2.3% since reporting earnings (as of February 11, 2016).

CenturyLink Inc.'s (NYSE:CTL) solid quarterly performance was buoyed by increased revenues from the acceptance and recognition of Connect America Fund (CAF) phase II funds, along with strength in high-bandwidth data services and consumer strategic revenues. The telecom company's fourth-quarter 2015 adjusted earnings per share of 80 cents surpassed the Zacks Consensus Estimate of 65 cents and were up 33.3% year over year. Quarterly total revenue of $4,476 million rose 0.9% from the prior-year quarter and surpassed the Zacks Consensus Estimate of $4,427 million. The stock climbed 11% since reporting earnings (as of February 11, 2016).

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 February 11, 2016). Below, we discuss four of these that are in focus in the coming days (see all Telecommunication ETFs here).

iShares U.S. Telecommunications ETF (NYSEARCA:IYZ)

IYZ tracks investment results before fees and expenses corresponding to the price and yield performance of the Dow Jones US Select Telecommunications Index. The fund manages assets worth nearly $416.6 million and has an average trading volume of roughly 438,000 shares a day. It charges an expense ratio of 43 basis points a year.

IYZ holds 25 stocks and has a concentrated approach in the top 10 holdings, with almost 63% of the asset base invested in them. Among individual holdings, top stocks in the ETF include AT&T, Verizon and CenturyLink, with asset allocation of 13.3%, 13.1% and 6.03%, respectively. The four major sectors of this ETF include Integrated Telecom, Wireless Telecom, Alternative Carriers and Communications Equipment, with asset holdings of 56.1%, 23.3%, 18.1% and 2.5%, respectively. The product lost 2.1% in the past 10 days and currently has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook.

Fidelity MSCI Telecommunications Services Index ETF (NYSEARCA:FCOM)

This ETF tracks investment results before fees and expenses corresponding to the performance of the MSCI USA IMI Telecommunication Services 25/50 Index. The fund manages assets worth nearly $89 million and has an average trading volume of roughly 56,000 shares a day. It charges an expense ratio of 12 basis points a year.

FCOM holds 33 stocks and has a concentrated approach in the top 10 holdings, with 73.5% of the asset base invested in them. Among individual holdings, AT&T, Verizon and CenturyLink number among the top five, with asset allocation of 25.8%, 25.4% and 4.1%, respectively. Diversified Telecommunication Services and Wireless Telecommunication Services are the two major sectors of this ETF, with asset holdings of 88.2% and 11.8%, respectively. The product lost 0.5% in the past 10 days and currently has a Zacks ETF Rank #3 with a Medium risk outlook.

iShares Global Telecom ETF (NYSEARCA:IXP)

This ETF tracks investment results before fees and expenses corresponding to the price and yield performance of the S&P Global 1200 Telecommunications Sector Index. The fund has nearly $356.7 million of assets under management and an average trading volume of roughly 41,000 shares a day. The fund charges an expense ratio of 47 basis points a year.

IXP holds 31 stocks in its portfolio and has a concentrated approach in the top 10 holdings, with approximately 74% of the asset base invested in them. Among individual holdings, top stocks in the ETF include AT&T and Verizon, with asset allocation of 18.9% and 17.3%, respectively. Integrated Telecommunication Services, Wireless Telecommunication Services and Alternative Carriers are the three major sectors, with asset holdings of 77.5%, 21.2% and 1.2% respectively. It fell almost 0.6% in the last 10 days and currently has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook.

Vanguard Telecom Services ETF (NYSEARCA: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 billion and an average trading volume of roughly 96,000 shares a day. The fund charges an expense ratio of 10 basis points a year.

VOX holds 31 stocks in its portfolio and has a concentrated approach in the top 10 holdings, with 71.1% 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 50%. Integrated Telecommunication Services, Alternative Carriers and Wireless Telecommunication Services are the three major sectors, with asset holdings of 63.1%, 20.8% and 16.1%, respectively. The fund lost 0.7% in the last 10 days and currently has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook.

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