How Will Telecom ETFs React to Decent Q3 Earnings?

Rising trends of digitization and virtual mode of communication continue to aid the telecom sector amid the ongoing health crisis. This has resulted in increasing demand for high-speed Internet connection and stable connectivity. Firms are working toward improving the management of the rise in data traffic as people continue to work from home and prefer limited and small gatherings. Companies are also preparing their fiber optic networks to support 4G LTE and 5G wireless standards as well as wireline connections. The introduction of 5G smartphones is likely to encourage telecom operators to make the 5G network more pervasive.

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

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

Earnings in Focus

On Oct 21, AT&T Inc. T reported mixed third-quarter 2021 results, with adjusted earnings beating and revenues lagging the Zacks Consensus Estimate. Excluding non-recurring items, adjusted earnings in the quarter were 87 cents per share compared with 76 cents a year ago. The bottom line surpassed the Zacks Consensus Estimate by 9 cents. Quarterly GAAP operating revenues declined 5.7% year over year to $39.92 billion and lagged the Zacks Consensus Estimate of $40.54 billion.

For full-year 2021, management reinstated its guidance considering decent quarterly performance. AT&T continues to project adjusted earnings to grow low- to mid-single digits. Revenues are likely to grow 2-3%. The company expects free cash flow of around $27 billion, with a dividend payout in the high 50% bracket.

On Oct 20, Verizon Communications Inc. VZ reported third-quarter 2021 adjusted earnings of $1.41 per share and beat the Zacks Consensus Estimate by 5 cents. Quarterly aggregate operating revenues rose 4.3% year over year to $32.92 billion. However, the metric lagged the Zacks Consensus Estimate of $33.41 billion.

Verizon revised its earlier guidance for 2021 to better reflect the improving business conditions. The company now expects adjusted earnings in the range of $5.35 to $5.40 per share, up from the earlier projection of $5.25 to $5.35.  Total wireless service revenues are likely to grow in the range of 4%, up from 3.5-4% expected earlier.

On Nov 3, Lumen Technologies LUMN reported mixed third-quarter 2021 results, with the bottom line surpassing the Zacks Consensus Estimate but the top line lagging the same. Quarterly adjusted net income came in at $521 million or 49 cents per share compared with $384 million or 35 cents per share in the prior-year quarter. The bottom line surpassed the Zacks Consensus Estimate by 11 cents. Quarterly total revenues dropped 5.4% year over year to $4.89 billion. The top line lagged the consensus estimate of $4.92 billion.

For 2021, Lumen expects adjusted EBITDA in the range of $8.4-$8.6 billion. Adjusted free cash flow is projected between $3.6 billion and $3.8 billion, up from $3.1-$3.3 billion expected earlier. Capital expenditures are estimated between $2.8 billion and $3 billion compared with prior expectations of $3.2-$3.5 billion.

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

This ETF provides exposure to U.S. companies that provide telephone and Internet products, services, and technologies. It has AUM of $438.2 million and charges 42 basis points (bps) as fees per year. It holds about 21 securities in its basket and puts about 21.8% weight in the in-focus companies. IYZ has a Zacks ETF Rank #3 (Hold), with a Medium-risk outlook (read: 5 ETFs to Gain on Cisco's 4-Year Growth Outlook).

Vanguard Communication Services ETF VOX

This ETF is one of the most popular funds in the communication services space. It has AUM of $4.72 billion and charges 10 bps as fees per year. It comprises 114 holdings, with the above-mentioned companies taking about 9.5% of the fund. VOX has a Zacks ETF Rank #3, with a Medium-risk outlook (read: Stocks & ETFs to Gain From Final Nod for Infrastructure Bill).

Fidelity MSCI Communication Services Index ETF FCOM

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 $952 million and charges 8 bps as fees per year. It holds about 112 securities in its basket, with the above-mentioned companies taking about 8.5% weight in the fund. FCOM has a Zacks ETF Rank #1 (Strong Buy), with a Medium-risk outlook (read: Can Google ETFs Keep Gaining on Q3 Earnings Optimism?).

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AT&T Inc. (T) : Free Stock Analysis Report
 
Verizon Communications Inc. (VZ) : Free Stock Analysis Report
 
Vanguard Communication Services ETF (VOX): ETF Research Reports
 
Fidelity MSCI Communication Services Index ETF (FCOM): ETF Research Reports
 
iShares U.S. Telecommunications ETF (IYZ): ETF Research Reports
 
Lumen Technologies, Inc. (LUMN) : Free Stock Analysis Report
 
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