Seeking Alpha
Large-cap, mega-cap, telecom, long/short equity
Profile| Send Message|
( followers)  

Verizon Communications Inc. (NYSE:VZ) reported its 2Q'13 earnings on July 18, in which it managed to beat analyst expectations and reported an EPS of $0.78, with an earnings surprise of 1.4%. The company's wireless segment continued to drive growth as customers continued to switch to wireless-featured products. Furthermore, effective cost management and better performance in all the strategic areas has led to VZ delivering strong results.

Verizon Communication Inc. is one of the leading U.S. communication service providers. The company offers both wireless and wireline products and services to consumers, businesses and government agencies, across 150 countries.

Key Financial Highlights of 2Q'13

· Both operating income and earnings per share experienced significant YoY growths of 16% and 21.9%, respectively.

· Wireless operating income margin expanded to 32.4%, whereas wireline margin shrunk to 0.8%

· Retail connections crossed 100 million, with ARPA (average revenue per account) reaching $152.5.

· The company managed to add 7.5 million new smart phones and around 88% of device activations were smart phones.

· 4G LTE expansion has been completed and is available across 500 markets in the U.S.

· FiOS revenue grew by 14.7% YoY, contributing around 71% to consumer revenue.

VZ Planning to Expand North

VZ is looking for opportunities to expand its operations in Canada. This will change the dynamics of the Canadian Telecoms Industry since currently the three telecoms giants are controlling more than 90% of the market. As of now, VZ has made its initial offer of $700 million to Wind Mobile, and the company has also shown an interest in Mobilicity.

The Canadian government somewhat failed to encourage competition after the 2008 spectrum auction. Several new companies emerged after the auction, but they failed to achieve the desired results. However, I believe that in VZ's case, the outcome will perhaps be better due to its perfect mix of experience, capital and technology. Moreover, the strong brand name will enable the company to penetrate Canadian markets, which are not as saturated as U.S. markets. VZ is also pushed to the North by the possible cost savings in terms of roaming charges, which are estimated to be around $300-350 million.

Dividends

The company has been the stock of choice for dividend-seeking investors, as it has been offering an attractive dividend yield of 4.1% in a currently low-yield environment. VZ generates around $4 billion every quarter in the form of free cash flows to maintain its stable dividends.

DCF:

I have used free cash flow estimates until 2015 and a 7.52% WACC (using cost of equity of 9.25% and cost of debt of 3.5%). Furthermore, I have used a terminal year growth rate of 0.5%.

2014

2015

2016

Terminal Value of FCF

Estimated Free Cash Flow

$13,200

$14,155

$14,862

$228,909

Present Value

$12,276

$12,243

$11,940

$184,134

Total Value to firm = $12,276+$12,243+$11,940+$184,134=$220,593 million
Total Debt= $52,881 million
Total Value to firm - Total Debt = Total Equity value
$220,593 - $52,881= $167,712 million
Share Outstanding = 2,861 million

Target Price = Total Equity Value/Share Outstanding
$58.62 = $167,712/2,861

P/E Multiple

Average P/E of VZ

VZ - Estimated 2014 EPS

Price Target
(Average P/E *estimated 2014 EPS)

16.4x

Bull case=3.65

$59.86

16.4x

Bearish case=3.05

$50.02

Risks

SoftBank-led Sprint (NYSE:S) has managed to improve its competitive positioning, which can affect VZ's market share. VZ is also dependent on the overall economic momentum.

Conclusion

Companies

P/S

P/BV

PEG ratio5 yr expected

Next 5 year growth rate

VZ

1.24x

4.36x

1.73

10.48%

AT&T,Inc. (NYSE:T)

1.52x

2.22x

2.24

6.43%

BCE, Inc. (NYSE:BCE)

1.60x

2.99x

3.17

4.50%

Source: Yahoo Finance

As you can see from the table above, the company is at a significant discount among its peers. Future growth rates and its long history of attractive dividend yield paint an encouraging outlook for the company. I believe that VZ is attractive for both growth and value investors.

Source: Verizon Maintains Its Attractiveness For Investors