Telecom ETFs Draw Attention After Verizon’s Lackluster Earnings Results

From Zacks: Shares of Verizon Communications (VZFree Report) dropped 1.08% at market close on Thursday, April 21, 2017. The company reported a 7.8% sequential decrease in revenues.

It reported revenues of $29.814 billion in the first quarter of 2017 compared with $32.340 billion in the fourth quarter of 2016 and $32.171 billion a year earlier. It failed to beat the Zacks Consensus Estimate on both earnings and sales in the first quarter of 2017 (read: Verizon Lags Q1 Earnings and Revenues Estimate).

Q1 Performance
Verizon reported non-GAAP earnings per share of $0.95, which fell short of the Zacks Consensus Estimate of $0.98. Moreover, Verizon’s first quarter revenues also missed Zacks Consensus Estimate of $30.504 billion.

Wireless Business Performance
Verizon reported revenues of $20.878 billion in its wireless segment compared with a $22.004 billion in the year-ago quarter. The telecom company attributed this decline of 5.1% primarily to its loss of 307,000 postpaid customers, which included phone losses to the tune of 289,000. It also stated that it lost 17,000 prepaid customers in the quarter.

Wireline
Wireline segment revenues dropped to $7.876 billion from $7.923 billion a year earlier. However, some respite was provided by the company’s Fios revenues, which grew to $2.891 billion from $2.761 a year earlier. The company expects to capitalize on customer growth in this segment. Net additions in Fios digital connections were 14,000, while additions to Fios Internet subscribers came to 35,000.

Outlook
Verizon expects its 2017 organic revenues to be flat with 2016 levels. It expects its consolidated capital spending to be in the range of $16.8 to $17.5 billion. On the tax front, Verizon expects a full-year effective tax rate of 34-36%.

In the current scenario, let’s have a look at some ETFs that have a relatively high exposure to Verizon.

Vanguard Telecommunication Services ETF (VOXFree Report)
This ETF is one of the most popular funds in the telecom space (read: Welcome Trump Era with These ETFs).

It has AUM of $1.40 billion and charges 10 basis points as fees per year. The fund has a 22.27% exposure to Verizon Communications Inc (as of April 19, 2017). The fund returned 5.52% in the last one year but lost 2.29 % in the year-to-date time frame (as of April 20, 2017). The fund was down 0.21% at market close on April 20, 2017. VOX currently has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook.

Fidelity MSCI Telecommunication Services ETF (FCOMFree Report) :
This ETF provides exposure to the U.S. telecom space at a really low expense ratio.

It has AUM of $139.7 million and charges 8 basis points as fees per year. The fund has a 21.19% exposure to Verizon Communications Inc (as of April 19, 2017). The fund returned 8.89% in the last one year and 1.87% in the year-to-date time frame (as of April 20, 2017). The fund was down 0.55% at market close on April 20, 2017. FCOM currently has a Zacks ETF Rank #3 with a Medium risk outlook (read: Telecom ETFs: What Lies Ahead in 2017?).

iShares Global Telecom ETF (IXPFree Report)
This ETF provides exposure to the global telecom industry.
It has AUM of $301.65 million and charges 47 basis points as fees per year. Considering the top three holdings from a geographical perspective, the fund has 38.77% exposure to the U.S., 16.57% to Japan, and 8.34% to United Kingdom. The fund has 16.18% exposure to Verizon Communications Inc (as of April 19, 2017). The fund lost 5.53% in the last one year but gained 0.87% in the year-to-date time frame (as of April 20, 2017). The fund was up 0.49% at market close on April 20, 2017. IXP currently has a Zacks ETF Rank #3 with a Medium risk outlook.

Source: Yahoo Finance

To Conclude
Verizon fell short of the consensus estimate on both earnings and revenues, primarily due to a decline in postpaid customers. However, its outlook remains strong and it expects a turnaround in its wireless segment and strong performance in the Fios segment. As a result, we believe it is best to remain on the sidelines for now.

The Vanguard Telecommunication Services ETF (NYSE:VOX) closed at $96.70 on Friday, down $-1.16 (-1.19%). Year-to-date, VOX has declined -3.44%, versus a 4.95% rise in the benchmark S&P 500 index during the same period.

VOX currently has an ETF Daily News SMART Grade of A (Strong Buy), and is ranked #6 of 54 ETFs in the Technology Equities ETFs category.


This article is brought to you courtesy of Zacks Research.

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