2013: A Turnaround Year For Verizon?

| About: Verizon Communications (VZ)

Verizon Communications (NYSE:VZ) is a global telecommunication service provider with presence in more than 150 countries. It operates America's most reliable wireless network and employs the latest technologies catering to nearly all of the Fortune 500 companies. A Dow 30 company with $116 billion in 2012 revenues, Verizon serves approximately 25% of the US population.

Q4 Results - Net loss, but high investor confidence

Verizon has always performed exceptionally well among telecom companies with a dividend yield of 4.65%. Massive revenue generating capacity and strong cash flows are the reason why the stock is a hit among income investors. It has jumped 22% in the past one year and investors have flocked to reap the stock's dividend. Telecom companies witness a huge amount of debt in their balance sheet and are generally valued by the enterprise value ('EV) to earnings before interest, tax, depreciation and amortization ('EBITDA) ratio. Verizon stands out in this aspect and has an impressive ratio of 6.19. Although Verizon suffered a net loss of $2 billion in the last quarter, it increased the data revenue to $6.3 billion. Verizon also added a substantial number of broadband subscribers and FiOS internet users in the past year. All these figures show Verizon is steering its ship in the right direction despite posting a net loss.

New Initiatives

Verizon has recently started investing heavily in the next generation telecommunication space. The company invested more than $300 million in Texas wire line communication and IT infrastructure in 2012. Along with the increasing dominance of smartphones in the market, data revenues are constantly on the rise. High speed in data will enable growth in other industries like banking, mobile payments and healthcare. For Verizon, it managed to shift its customer base to the higher average revenue per user (ARPU) yielding smartphones. Around 60% of all retail post paid phone sales were smartphones. Also data revenues constitute around 42% of Verizon's total revenue last quarter.

The long term evolution (LTE) of Verizon is an extensive network and Verizon is trying to capitalize on it by having a Redbox venture with Coinstar (NASDAQ:CSTR) Inc. which offers video streaming facilities and DVD rentals on a limited trial basis. With the growing streaming market and saturating voice market, the deal is the right move for Verizon.

Limitations for the Stock

All is not well for Verizon. Telephones account for two-third of the company's fixed line revenue and Verizon's margin from these wire line businesses has been declining. It is slowly becoming a sunk cost for the company. Moreover, the recent "We the People" petition signed by 114,000 people asking to decriminalise the unlocking of cell phones can mean a loss of business for Verizon. Customer attrition rate can go up and Verizon, being in the CDMA business, will suffer the most.

The Peer Market


On a price to equity basis, Verizon is valued significantly higher than AT&T. Blackberry is launching its new Z10 smartphone on AT&T on 22nd May, 2012 one week before launching on Verizon. It remains to be seen whose customers will get attracted more to the new device. Also, AT&T has hit back against Verizon's 'Share Everything Plan' by introducing its own plan, 'Mobile Share Plan'.

Sprint (NYSE:S)

Smaller players like Sprint and T mobile are unable to match Verizon's dominance in the pricing strategy for smartphones. Customers value the superior data plans and unmatched coverage even though Verizon is priced at a premium.

Outlook for 2013

1. Apart from being a top player in the telecommunication space, Verizon is doing its bit for a greener and cleaner environment. Recently its eco-friendly initiative 'MAGIC' (Mobile Area Garage Installation Centre) has helped reduce carbon dioxide emission and ease traffic congestion. Verizon introduced a special fleet of buses for better transportation of their company technicians across New York City thus proving its long standing commitment to sustainability.

2. Verizon Wireless is the number one US carrier by subscribers having a joint stake with Vodafone. It is looking to buy out the 45% stake held by Vodafone sometime during this year. The deal, if passed, would further increase the market value of Verizon Wireless currently valued at $248 billion. There might be some problems, like Verizon may have to pay a substantial amount of capital gains tax on the deal. But this can be avoided by selling Vodafone's non US assets in struggling economies like Italy and Spain.

3. Another initiative of Verizon includes payment of television providers by the number of people actually watching their channels. This can actually revolutionize the television world as it will increase the competition among TV channels to get the maximum target rating point (TRP) based on the number of viewers. Since Verizon FiOS is the most popular bundled service of internet, television and telephone across every US homes, top channels will need to pay more to stay ahead of the competition.

Considering all the initiatives, the outlook for Verizon in the future looks positive as of now. But nothing can be said as competition is cut throat in the telecom space and technologies change quite fast. I will rate the stock as 'hold' and wait for a couple of months before taking any concrete decision.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.