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Can Telecom ETFs Gain Despite Mixed Q1 Earnings?

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The telecom sector is seeing growing digitization trend and virtual mode of communication amid the pandemic, resulting in accelerated demand for high-speed Internet connection and stable connectivity. Moreover, firms have come together to improvise management of the rise in data traffic. The companies are also preparing their fiber optic networks to support 4G LTE and 5G wireless standards as well as wireline connections. Going on, the introduction of 5G smartphones is likely to encourage telecom operators to make 5G network more pervasive.

Players in the sector are trying to redefine business plans to optimize efficiencies and operations, and to reduce costs while supporting employees and customers with several financial packages.

Meanwhile, the coronavirus crisis has dealt a huge blow to the telecom sector, with firms facing higher costs associated with bad debt, production shutdowns and expenses related to retail store closures, leading to lower equipment sales and advertising revenues. However, increasing optimism about the space, the United States is now also witnessing a decline in daily new coronavirus infection cases count.

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

Earnings in Focus

On Apr 22, AT&T Inc. (T - Free Report) reported relatively solid first-quarter 2021 results, with adjusted earnings and revenues beating the Zacks Consensus Estimate. Excluding non-recurring items, adjusted earnings in the quarter were 86 cents per share compared with 84 cents a year ago. The bottom line surpassed the Zacks Consensus Estimate by 9 cents. Quarterly GAAP operating revenues rose 2.7%% year over year to $43.94 billion and, surpassed the Zacks Consensus Estimate of $42.73 billion.

For 2021, management expects free cash flow in the vicinity of $26 billion, with a dividend payout in the high 50% bracket. Adjusted earnings are likely to remain stable compared with that of 2020 on revenue growth of around 1%. 

On Apr 21, Verizon Communications Inc. (VZ - Free Report) reported first-quarter 2021 adjusted earnings of $1.31 per share and beat the Zacks Consensus Estimate by a couple of cents. Quarterly aggregate operating revenues rose 4% year over year to $32.87 billion. The metric also surpassed the Zacks Consensus Estimate of $32.44 billion.

Verizon has reiterated its optimistic guidance for 2021. The company currently expects adjusted earnings in the range of $5.00 to $5.15 per share. While service and other revenues are likely to increase in excess of 2%, wireless service revenues are estimated to increase more than 3%. 

On May 5, Lumen Technologies (LUMN - Free Report) reported mixed first-quarter 2021 results, with the bottom line surpassing the Zacks Consensus Estimate but the top line lagging the same. Quarterly adjusted net income (excluding integration and transformation costs and special items) came in at $475 million or 44 cents per share compared with $314 million or 29 cents per share in the prior-year quarter. The bottom line surpassed the Zacks Consensus Estimate by 3 cents. Quarterly total revenues dropped 3.8% year over year to $5.03 billion. The top line lagged the consensus estimate of $5.06 billion.

For 2021, Lumen projects adjusted EBITDA in the range of $8.4-$8.6 billion. Adjusted free cash flow is expected between $2.8 billion and $3 billion. Capital expenditures are projected between $3.5 billion and $3.8 billion. Depreciation and amortization are estimated within the range of $4.2-$4.4 billion. The effective income tax rate is likely to be 27%.

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 - Free Report)

This ETF provides exposure to U.S. companies that provide telephone and Internet products, services, and technologies. It has AUM of $468.8 million and charges 42 basis points as fees per year. It holds about 45 securities in its basket and puts about 49.2% weight in the in-focus companies. IYZ has a Zacks ETF Rank #2 (Buy), with a Medium-risk outlook.

Vanguard Communication Services ETF (VOX - Free Report)

This ETF is one of the most popular funds in the communication services space. It has AUM of $3.79 billion and charges 10 basis points as fees per year. It comprises 113 holdings, with the above-mentioned companies taking about 9.7% of the fund. VOX has a Zacks ETF Rank #3 (Hold), with a Medium-risk outlook (read: Will Google ETFs Keep Shining on Q4 Earnings Optimism?).

Fidelity MSCI Communication Services Index ETF (FCOM - Free Report)

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 $747.9 million and charges 8 basis points as fees per year. It holds about 103 securities in its basket, with the above-mentioned companies taking about 9.1% weight in the fund. FCOM has a Zacks ETF Rank #3, with a Medium-risk outlook (read: ETFs in Focus Post Solid Facebook Q1 Results).

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