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With unprecedented growth in high-speed mobile Internet traffic, in particular wireless data and video, the telecom industry is evolving into a very competitive space. Heightened competition due to increasing mergers & acquisition activities and improved offerings is a major headwind for telecom stocks.
Amid this competitive pressure, the telecom giant Verizon (VZ - Analyst Report) once again delivered double-digit earnings growth for the fourth quarter, marking 2013 as a year of strong growth. This suggests increasing confidence in the company’s growth outlook.
Verizon also plans to buy the digital media division of the world’s largest chipmaker Intel (INTC). Further, the company is expected to close its $130 billion buyout of Vodafone’s (VOD) 45% stake on February 21 (see: all the Telecom ETFs here).
Verizon Earnings in Focus
The company reported earnings of 66 cents per share, up 73.7% from the year-ago quarter and a penny ahead of the Zacks Consensus Estimate. Revenues rose 3.4% year over year to $31.1 billion, and managed to surpass the Zacks Consensus Estimate of $31.0 billion. Strong performances were largely driven by continued subscriber growth and improving wireless and FiOS services.
With this, full-year 2013 earnings came in at $2.84 (up 26.8% year over year) on revenues of $120.6 billion (up 4.1% year over year).
Verizon-Intel Media Deal
The deal will likely boost the development of Verizon’s next-generation video services, as Intel Media technology would deliver video over both its FiOS fiber-optic home broadband service and 4G wireless network service. This would increase subscriber growth and in turn drive revenue growth (read: Sluggish Intel Q4 Earnings Puts These ETFs in Focus).
The acquisition, expected to be completed in the first quarter, would also reduce the cost of building its own technology.
This acquisition will be the world’s third largest in history upon completion. It will allow Verizon to have full control over its huge wireless business, which has more than 100 million domestic subscribers, and is a key part of the company’s profits and product mix. Further, the acquisition will be immediately accretive to earnings per share by 10% (read: 3 Telecom ETFs to Watch on Huge Verizon Deal).
Despite the earnings beat and Intel buyout offer, Verizon shares fell more than 1% on the session at close, on volume that was three times above normal. However, this drop might be temporary, as the outlook for Verizon seems bright. Additionally, a solid Zacks Industry Rank in the top 37% for Verizon adds to the bullish outlook and suggests good trading ahead.
As such, investors could definitely take advantage of the dip in the share price of VZ with lower risk in the form of ETFs. There are several ETFs having a hefty allocation to the largest U.S. mobile carrier and will be in focus in the coming days. Below, we have highlighted some of them for investors seeking a broad play on the telecom world:
Vanguard Telecommunication Services ETF (VOX - ETF report)
The most popular telecom ETF – VOX – tracks the MSCI US Investable Market Telecommunication Services 25/50 Index and holds 32 stocks in its basket. Verizon occupies the second position in the basket with 21.3% of assets. About three-fifths of the portfolio is skewed toward integrated telecom services, followed by wireless and alternative carriers.
The product has amassed $573.4 million in its asset base and charges 14 bps in annual fees. VOX lost nearly 1% in the year-to-date time frame and has a Zacks ETF Rank of 3 or ‘Hold’ rating with ‘Medium’ risk outlook.
Fidelity MSCI Telecommunication Services Index ETF (FCOM - ETF report)
This fund follows the MSCI USA IMI Telecommunication Services 25/50 Index, holding 33 stocks in its basket. Verizon takes the top spot at 21.06% and from a sector look, diversified telecom services make up for 74% of assets (read: A Comprehensive Guide to Telecom ETFs).
The ETF is unpopular with just $25.5 million in AUM while the expense ratio came in at 0.12%. The fund is down over 1% year-to-date.
iShares U.S. Telecommunications ETF (IYZ - ETF report)
This is one of the most popular ETFs in the broad telecom space with AUM of $497 million. The product tracks the Dow Jones U.S. Select Telecommunications Index, giving investors exposure to 26 stocks while charging 45 bps in fees and expenses.
Verizon takes the second spot in the basket with 10.87% share. In terms of industrial exposure, fixed line telecom accounts for 56.5% while mobile telecom takes the rest. IYZ is down 0.10% so far this year, and has a Zacks ETF Rank of 2 or ‘Buy’ rating with ‘Medium’ risk outlook.
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