U.S. national security, economy and global standing are expected to benefit immensely from technological developments to be brought in by the 5G world, and M&A strategies remain the chosen way for going forward in the telecom space, per a recent survey of 82 U.S. telecommunications' CEOs . However, a rising rate scenario is hurting this capital-intensive sector alongside trade war concerns (read: Fed Meet Signals December Rate Hike: ETFs That Gained ).
Against this backdrop, here we discuss the latest earnings releases of the two top wireless service providers, Verizon VZ and AT&T T , which reported Q3 results on Oct 23 and Oct 24, respectively. Verizon's earnings were in line with the Zacks Consensus Estimate and AT&T missed the same. Revenue estimates were topped by both (read: Want Large Caps & Guard Against Trade War Too? Play These ETFs ).
Verizon recorded strong top-line growth led by solid service revenues and remains on track to benefit from the 5G era. The bottom line benefited from significant savings from the tax reform.
Adjusted earnings came in at $1.22 per share in Q3 compared with 98 cents in the year-earlier quarter and surpassed the Zacks Consensus Estimate of $1.19. Revenues came in at $32.61 billion, beating the Zacks Consensus Estimate of $32.54 billion and increasing 2.8% year over year. Verizon has a Zacks ETF Rank #3 (Hold) and a VGM Score of B.
For full-year 2018, Verizon reiterated its earlier guidance of both GAAP revenue and adjusted earnings per share increase by low single-digit percentage rates driven by expected savings from the tax reform and higher cash flow from operations.
AT&T experienced solid wireless performance for the third quarter including postpaid phone gains, strong prepaid phone growth and accretive WarnerMedia contribution. However, reported earnings of 90 cents per share missed the Zacks Consensus Estimate of 93 cents. Earnings improved 21.6% year over year. Revenues came in at $45.74 billion, beating the Zacks Consensus Estimate of $45.63 billion and increasing 15.3% year over year. It has a Zacks ETF Rank #3 with a VGM Score of B.
AT&T reiterated its guidance for 2018 and continues to expect adjusted EPS at the high end of the previously provided $3.50.
What Else is Happening in the Sector?
The ongoing U.S.-Sino trade war tension is a concern. The Trump administration has imposed a new round of tariffs on $200 billion worth of Chinese goods which took effect on Sep 24, affecting a broad range of equipment belonging to telecom, which thereby is increasing cost for the companies.
Also , recently, the telecom industry suffered a blow when the U.S. Supreme Court declined to number of challenges to Obama-era "net neutrality" regulations pushing the sector ETFs down. Vanguard Telecommunication Services ETFVOX , iShares U.S. Telecommunications ETFIYZ and Fidelity MSCI Telecommunication Services ETFFCOM have lost 6.4%, 4.2% and 3%, respectively, since Sep 24 (as of Nov 9) (see: all the Telecommunication ETFs ).
ETFs in Focus
The fund tracks the MSCI US Investable Market Telecommunication Services 25/50 Index designed to capture the large, mid and small-cap segments of the U.S. equity universe. It comprises 73 holdings and has 7.9% exposure to AT&T and 5.2% to Verizon. The fund's AUM is $1.4 billion and expense ratio is 0.10%.
The fund tracks the Dow Jones U.S. Select Telecommunications Index targeting companies in fixed-line telecommunications and mobile telecommunications sectors. It comprises 46 holdings with 16.3% exposure to Verizon and 14.6% to AT&T. The fund's AUM is $520.1 million and expense ratio is 0.43%.
The fund tracks the MSCI USA IMI Telecommunication Services 25/50 Index. It comprises 22 holdings and has a 24.5% exposure to Verizon and 21.4% to AT&T. The fund's AUM is $188 million and expense ratio is 0.08%.
Want key ETF info delivered straight to your inbox?
Zacks' free Fund Newsletter will brief you on top news and analysis, as well as top-performing ETFs, each week. Get it free >>