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Can Telecom ETFs Gain Despite Mixed Q4 Earnings?

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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.

Meanwhile, a growing digitization trend and virtual mode of communication amid the pandemic has accelerated demand for high-speed Internet connection and stable connectivity. Moreover, the firms have come together to manage the spike 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.

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

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 Jan 27, AT&T Inc. (T - Free Report) reported relatively decent fourth-quarter 2020 results, with adjusted earnings and revenues beating the Zacks Consensus Estimate. Excluding non-recurring items, adjusted earnings in the quarter were 75 cents per share compared with 89 cents a year ago. The bottom line surpassed the Zacks Consensus Estimate by a couple of cents. Quarterly GAAP operating revenues slid 2.4% year over year to $45.69 billion but, surpassed the Zacks Consensus Estimate of $44.56 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 Jan 26, Verizon Communications Inc. (VZ - Free Report) reported fourth-quarter 2020 adjusted earnings of $1.21 per share and beat the Zacks Consensus Estimate by 5 cents. Quarterly aggregate operating revenues remained almost flat year over year at $34.69 billion. The metric also surpassed the Zacks Consensus Estimate of $34.44 billion.

Verizon has issued an optimistic guidance for 2021 based on the resilient earnings performance and projected trends. 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 Feb 10, Lumen Technologies (LUMN - Free Report) reported fourth-quarter 2020 results, with the bottom line surpassing the Zacks Consensus Estimate.  Quarterly adjusted net income (excluding integration and transformation costs and special items) came in at $522 million or 48 cents per share compared with $352 million or 33 cents per share in the prior-year quarter. The bottom line surpassed the Zacks Consensus Estimate by 16 cents. Quarterly total operating revenues dropped 3.4% year over year to $5.13 billion. The top line lagged the consensus estimate by a narrow margin.

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 $408.8 million and charges 42 basis points as fees per year. It holds about 45 securities in its basket and puts about 45.2% weight in the in-focus companies. IYZ has a Zacks ETF Rank #2 (Buy), with a Medium-risk outlook (read: Cisco Reports Revenue Decline Again: ETFs in Focus).

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 $3.63 billion and charges 10 basis points as fees per year. It comprises 111 holdings, with the above-mentioned companies taking about 9.3% 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 $709.3 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 8% weight in the fund. FCOM has a Zacks ETF Rank #3, with a Medium-risk outlook (read: Facebook Tops, Warns of Uncertainty: ETFs in Focus).

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