IXP - IXP: Global Tech And Media Stocks Are Undervalued

2023-05-01 18:32:57 ET

Summary

• IXP invests in global tech and media stocks.
• I think the fund is undervalued, and therefore I take a bullish stance.
• However, I would caution that on a volatility-adjusted basis, IXP is less attractive. For long-term diversified shareholders, this probably does not matter, but better risk-adjusted returns likely exist elsewhere.

iShares Global Comm Services ETF ( IXP ) is an exchange-traded fund that provides investors with exposure to companies operating within the mass media, entertainment, social media, search engine, video/gaming and telecommunication services industries. The fund invests across small-, mid- and large-cap segments of the global equity market. While global, the fund follows a conventional market-cap weighted methodology, which results in a significant United States exposure of 68% as of April 27, 2023.

IXP's expense ratio is reported as 0.40%, while net assets under management summed to $275 million as of April 28, 2023. Note that this follows a good start to the year in 2023 of almost 20% year-to-date (in share price appreciation), as well as net fund flows of circa $71 million over the past year (as illustrated in the graph below).

IXP is not particularly popular, then, in spite of recent inflows. Still, iShares report a 30-day median bid/ask spread of 0.16%, which is not too bad, so liquidity is there, and the fund is reasonably well diversified beyond the United States to make IXP interesting. A sector breakdown for IXP is presented below, showing heavier allocations to interactive media and services, and integrated telecommunication services.

Two of the fund's largest positions are Meta Platforms ( META ), i.e., the owner of Facebook, Instagram and WhatsApp among other projects (14.20% of the fund as of April 28, 2023), and Alphabet ( GOOG and GOOGL ), i.e., owner of Google and various other businesses, with a combined weighting of 23.69% as of the same date. So, the combined weight of both Meta and Alphabet was 37.89% as of recent. IXP only has 69 holdings in total, but the rest of the fund is fairly well diversified, with the top 10 presented below.

IXP's benchmark is known as the S&P Global 1200 Communication Services 4.5/22.5/45 Capped Index; IXP is designed to track the performance of this benchmark. We can use a recent factsheet for the fund to help gauge the valuation of IXP. This factsheet reveals trailing and forward price/earnings ratios of 28.42x and 17.06x, respectively, with a price/book ratio of 2.75x and an indicative dividend yield of 1.44%. This implies significant earnings growth over trailing earnings. However, on an adjusted basis, three- to five-year earnings growth is expected to be about 9.70% according to Morningstar .

I will assume that most inputs hold constant, including dividend distribution rates, and that the share buyback rate averages about 30% going forward. While the forward return on equity is projected to be about 16%, I am comfortable with assuming certain modest increases going forward using Morningstar's earnings growth rate as a base guide, and in light of share buybacks and dividends (these have the effect of reducing net assets/equity, thus helping to support higher returns on equity). My overall base estimate is that IXP could offer an IRR in the region of 12.8%.

It is also possible to see an expansion of the long-term earnings multiple, provided long-term rates fall back down to trend, and the equity risk premium remains in a healthy range (on average across all regions that IXP is exposed to). These are not a "given", but the current multiple of 17x is not expensive in my view. Based on the calculations above, IXP is undervalued. If I instead recalculated IXP's forward potential for a much more meager 3-4% average earnings growth rate (settling at 2% in the terminal year), the IRR would still hit circa 8.7% per year (still with no earnings multiple expansion). This would, at worst, suggest IXP is fairly valued.

Therefore, outside of a significant earnings recession going forward, IXP is very much likely undervalued, and my bias would be bullish. The fund is quite concentrated in tech and media, but this also makes the fund sensitive to the economy and broader markets in a pro-cyclical manner. Into a new business cycle, IXP therefore has the chance to outperform broader markets.

Meanwhile, the actual historical fund beta is close to 1x. On the other hand, based on my own findings, IXP's beta has changed over time; more recently it has enjoyed outperformance and higher beta (circa 1.30-1.70x over 20-100 days), while its longer-run beta is closer to the earlier cited 1x (about 1.15x over the past two years).

While I think IXP is undervalued and likely to benefit from the next market cycle, I would leave with the comment that on a volatility-adjusted basis IXP is not as attractive. IXP could outperform earlier on in the cycle, as it has been recently, but that outperformance might not look as impressive on a longer stretch relative to volatility. For very long-term holding periods and/or diversified investors, this might not matter, but in isolation I would suggest that any outperformance derived from IXP is likely to come mostly from its nature of being more volatile than average. Put another way: I would not expect IXP to generate a "high Sharpe" ratio in the medium term.

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