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Will Telecom ETFs Gain Despite Mixed Q2 Earnings?

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Like all other sectors, the telecom sector has been impacted by the coronavirus crisis. Telecom firms had to incur higher costs associated with bad debt, production shutdowns and expenses related to retail store closures, leading to lower equipment sales and advertising revenues. Also, companies are being forced to redraw their distribution channels for changing customer demand and preferences. The players in the sector are also trying to redefine business plans to optimize efficiencies and operations and to lower costs while supporting employees and customers with several financial packages.

However, the firms have come together to manage the increase in data traffic. Most of the industry players are installing the latest 4G LTE Advanced technologies to provide higher peak data speeds and capacity. The companies are also preparing their fiber optic networks to support 4G LTE and 5G wireless standards as well as wireline connections.

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

Earnings in Focus

On Jul 23, AT&T Inc. (T - Free Report) reported relatively healthy second-quarter 2020 results with adjusted earnings beating the Zacks Consensus Estimate and revenues lagging the same. Excluding non-recurring items, adjusted earnings in the quarter were 83 cents per share compared with 89 cents a year ago. The bottom line beat the Zacks Consensus Estimate by 5 cents. Quarterly GAAP operating revenues slid 8.9% year over year to $40.950 billion and lagged the Zacks Consensus Estimate of $41.393 billion.

AT&T has not provided any definite outlook for the third quarter as well as for 2020 due to the uncertainty surrounding the pandemic and its impacts on the economy.

On Jul 24, Verizon Communications Inc. (VZ - Free Report) reported second-quarter 2020 adjusted earnings of $1.18 per share compared with $1.23 a year earlier. Earnings surpassed the Zacks Consensus Estimate by 2 cents. Quarterly aggregate operating revenues slid 5.1% year over year to $30.447 billion but beat the Zacks Consensus Estimate of $29.910 billion.

For 2020, Verizon has maintained its guidance amid the coronavirus crisis. The company continues to expect adjusted earnings per share growth between -2% and 2%. Capital spending is likely to be in the range of $17.5-$18.5 billion.

On Aug 5, CenturyLink, Inc.  reported decent second-quarter 2020 results, with the top and the bottom line surpassing the Zacks Consensus Estimate. Net income (excluding integration and transformation costs, and special items) came in at $450 million or 42 cents per share compared with $369 million or 34 cents per share a year ago. The bottom line surpassed the Zacks Consensus Estimate by 10 cents. Quarterly total operating revenues dropped 3.4% year over year to $5.192 billion. The top line outpaced the consensus estimate of $5.138 billion.

CenturyLink has withdrawn its 2020 financial outlook for adjusted EBITDA, free cash flow and capital expenditures largely due to uncertainties surrounding the coronavirus pandemic. However, the company expects net cash interest in the range of $1.65-$1.70 billion, down from the prior guidance of $1.75-$1.80 billion. Depreciation and amortization outlook remained unchanged at the range of $4.7-$4.9 billion. The effective income tax rate, too, remained unchanged and is likely to be around 28%.

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 the U.S. companies that provide telephone and internet products, services, and technologies. It has AUM of $360.6 million and charges 42 basis points as fees per year. It holds about 43 securities in its basket and puts about 46.3% weight in the in-focus companies. IYZ has a Zacks ETF Rank #2 (Buy), with a Medium-risk outlook (read: 5 Sector ETFs Just Got Upgraded to Buy).

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 $2.68 billion and charges 10 basis points as fees per year. It comprises 115 holdings, with the above-mentioned companies taking about 10.7% of the fund. VOX has a Zacks ETF Rank #2, with a Medium-risk outlook (read: Will Google ETFs Keep Gaining on Q2 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 $549.1 million and charges 8 basis points as fees per year. It holds about 101 securities in its basket, with the above-mentioned companies taking about 10.3% weight in the fund. FCOM has a Zacks ETF Rank #2, with a Medium-risk outlook (read: Facebook Q2 Earnings Beat Estimates: ETFs Set to Soar).

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