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ETF News And Commentary

The U.S. telecommunication industry is seeing unprecedented growth in high-speed mobile Internet traffic, with wireless quickly becoming the present and future of the industry. Moreover, the industry is going through a consolidation period, which is expected to continue mainly due to the shortage of airwaves and for economies of scale.
 
Three of the largest U.S. operators in the telecommunications industry have just come out with their earnings results for the season. While the largest U.S. carrier, Verizon Communications Inc. ((VZ - Analyst Report)) beat both the top- and bottom-line estimates, rival AT&T Inc. (T) reported muted results, missing the Zacks Consensus Estimate on both counts.
 
A much smaller firm, Sprint (S), also managed to report market beating results, though the company continues to lose its postpaid subscribers. Below, we highlight these three and their recent reports in greater detail:
 
Sprint Earnings in Focus
 
The third largest operator reported fiscal first quarter 2014 earnings of 1 cent per share, ahead of the Zacks Consensus Estimate of a 4 cent loss. In fact, the company posted $23 million net income — its first quarterly profit in six years. Revenues came in at $8.79 billion, ahead of the Zacks Consensus Estimate of $8.77 billion.
 
However, the company continues to lose its postpaid subscribers which disappointed most investors. The company lost 245,000 postpaid subscribers in its most lucrative Consumer segment.
 
This caused shares of Sprint to end the day in the red, losing 3% on elevated volume (read: A Comprehensive Guide to Telecom ETFs).
 
AT&T Earnings in Focus
 
Earnings per share came in at 62 cents a share, down 7.5% year over year and a penny short of the Zacks Consensus Estimate. Though revenues edged up 1.6% year over year to $32.6 billion, they missed our estimates of $33.2 billion.
 
A record low churn rate and substantial increase in postpaid wireless subscribers led to the year-over-year revenue growth. However, a customer shift to phone financing using installment plans caused a drop in AT&T’s profits.
 
The shares of AT&T are up 1.34% following its earnings announcement on July 23.
 
Verizon Earnings in Focus
 
Verizon reported adjusted earnings of 91 cents per share, beating the Zacks Consensus Estimate by a penny and increasing 24.7% from year-ago earnings. Total revenue increased 5.7% year over year to $31.5 billion, ahead of the Zacks Consensus Estimate of $31.1 billion.
 
Strong revenue contribution from wireless services, improvement in wireless operating margins and increased demand for FiOS services led Verizon to post market beating results.  
 
Shares of VZ are up 1.53% following the July 22 earnings announcement.
 
Apart from the earnings headlines, Telecom stocks are currently in focus due to speculation that they could be finding new ways to reduce taxes. This came after Windstream Holdings (WIN - Analyst Report) said that it plans to spin off its telecom network business into a publicly traded real estate investment trust (REIT).
 
This news was seen as very positive for most, and a way to avoid taxes on a big chunk of their businesses. Should more companies take this route we could definitely see gains from stocks in this space in the future.
 
ETF Angle
 
Following the mixed bag of earnings from the telecom players and speculations that others might also take the REIT route to reduce taxes, most of the telecom stocks have recorded gains in the past one week. Accordingly, the telecom ETFs having the largest allocation to these companies are currently in focus.
 
Investors should closely monitor the movement in these funds and could catch the opportunity from any surge in the stock prices. Moreover, investors should also keep an eye on the below ETFs as the fourth largest mobile network operator T-Mobile US (TMUS) reports Q2 earnings before the open today.
 
Speculations are rife about a merger between the third and fourth largest mobile network operators in the U.S. – Sprint and T-Mobile, though it appears now that T-Mobile might be purchased by a European firm instead.
 
It is worth noting that all of the four stocks mentioned above have a mediocre Zacks Rank of 3 or ‘Hold’ rating (see: all the Telecom ETFs here).
 
Vanguard Telecommunication Services ETF (VOX - ETF report)

VOX is the largest ETF in the telecom space with an asset base of $728 million, but sees moderate trading volume of 45,000 shares a day.
 
The fund is heavily concentrated in its top two holdings – AT&T Inc. and Verizon – which together form 43% of total fund assets. Sprint and T-Mobile are also among the top 10 holdings having a combined exposure of 6.2%.
 
The fund has gained roughly 2.5% in the past one week and has added 8.7% in the year-to-date frame. VOX has a Zacks ETF Rank of 4 or ‘Sell’ rating with a ‘Medium’ risk outlook.
 
iShares U.S. Telecommunications ETF (IYZ - ETF report)
 
The fund tracks the Dow Jones U.S. Select Telecommunications Index to provide exposure to a small basket of 26 stocks. The fund pays a good dividend yield of 2.4%.
 
Verizon and AT&T Inc. occupy the top two spots in the fund, having roughly 13% exposure each. Sprint and T-Mobile are also among the top 10 holdings having 4.2% and 4.6% exposure, respectively.
 
IYZ has accumulated over half a billion dollars since inception and has a good trading volume of more than 200,000 shares a day. IYZ currently has a Zacks ETF Rank #2 or Buy Rating (read: 2 Hot Summer ETFs Surging to #1 Ranks).
 
Fidelity MSCI Telecommunication Service ETF (FCOM - ETF report)
 
The fund manages a small asset base of $66 million and has a huge exposure to AT&T Inc. and Verizon – which are the fund’s top two holdings and together occupy roughly 45% of fund assets. Moreover, Sprint and T-Mobile have approximately 3% allocation each in the fund.
 
The fund has added 2% in the past one week, 8.8% since the start of the year and currently carries a Zacks ETF Rank #3 or Hold Rating.
 
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