Verizon Communications Inc. (VZ) is the largest telecommunication company in the U.S. in terms of subscriber count, with a market capitalization of almost $127 billion. Its shares have traded up over 10% so far this year. Based on the company's recent performance as reflected in its 6.8 million smartphones sold, operational improvement in its key business metrics, and tremendous growth potential in the upcoming quarter, I am convinced that the company will once again post solid results. In this article, I will attempt to identify and analyze three key catalysts that will bring about growth in its key metrics in the last quarter of the current year, further strengthening its position in the industry.
Catalyst No. 1
Verizon is one of the industry leaders when it comes to selling smartphones. In the third quarter, the company sold 6.8 million smartphones, out of which 3.1 million were iPhones and 0.65 million were iPhone 5s. AT&T also reported strong smartphone sales of 6.1 million in the third quarter. Selling smartphones is extremely beneficial for telecoms as they bring in more revenues than the basic mobile devices due to increased data usage as well as the need to stay connected on the go. However, the downside to selling smartphones to the customers is subsidies which the telecom carriers have to bear. These subsidies are an upfront cost to companies like Verizon and AT&T, which eventually cause their margins to erode. However, interesting to note is that despite selling more smartphones in Q3 2012, which should have led to an erosion of wireless margins, Verizon reported a record wireless EBITDA margin of 50%. AT&T, on the other hand, reported a drop of 300 basis points for the quarter.
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As a leader in the telecom industry, as far as smartphone sales is concerned, further growth in Verizon's EBITDA margins can be expected in the fourth and last quarter due to its shared data plans, which will likely offset the margin erosion caused by increased smartphone sales.
Catalyst No. 2
As mentioned previously, Verizon and AT&T sell the major chunk of smartphones. However, the key differentiator between the two is the smartphone penetration. If we analyze the results of the two companies, the difference is very much visible. AT&T reported a smartphone penetration of 81% in the third quarter, meaning smartphone sales account for 81% of its total postpaid sales. On the other hand, Verizon ended the most recent quarter with a smartphone penetration of only 53%, up 3% from Q2 2012.
With a relatively lower and steadily rising smartphone penetration at Verizon, the company is better positioned to take advantage of the smartphone boom in the last quarter of the current financial year.
Catalyst No. 3
Verizon is also the industry leader as far as market coverage is concerned. With high speed LTE coverage in over 400 markets across the U.S., Verizon is ahead of its competition. This enhanced market coverage is proving to be its main growth engine as the company is adding a record number of subscribers to its network. In the most recent quarter, Verizon added a record 1.5 million postpaid customers, towering over AT&T that was able to add only 150,000 postpaid connections. These numbers are a clear indication that Verizon, with its improved service and better coverage, is stealing market share from its rival, AT&T.
VZ is trading at premium valuations compared to AT&T, however, they are justified because of the higher growth expectations for the company. The forward earnings multiple for Verizon is 15x, while it is 13x for AT&T. Earnings are expected to grow by 11% over the next five years, while AT&T's earnings are expected to grow by 6%. VZ currently offers an attractive dividend yield of 4.6%, well covered by its cash flow yield of 23%.
To sum up, Verizon is a better operational story than AT&T, which I believe is likely to reflect positively in its stock in the coming days. In a previous report on Verizon, I recommended a long position on the stock, and I reiterate my stance based on the discussed catalysts.