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Summary

  • Verizon’s acquisition of the Vodafone stake should result in both margin and revenue growth this year.
  • Verizon has created a dominant position in the market and added an impressive number of customers last year, which should aid earnings growth this year.
  • Verizon is cheaper, on a trailing P/E basis, than the industry, while its operating margins are also strong, making it a solid investment.

Telecommunications giant Verizon Communications (NYSE:VZ) has been lackluster in 2014 as shares are down 2%. However, considering that Verizon has a solid dividend yield of 4.40% to show for, investors don't have much reason to complain. But given the recent volatility in the stock market, Verizon's upcoming first-quarter results that are expected on April 24 can define the direction that it would be taking this year. Let's take a look at what's expected of Verizon and whether it is a good buy going into earnings.

Revenue and earnings expectations

According to Yahoo! Finance analyst estimates, Verizon should earn revenue of $30.67 billion in the first quarter. This would be an improvement of 4.30% from last year's numbers. On the earnings front, analysts expect Verizon to earn $0.85 per share, which is a good improvement over last year's $0.68 per share.

Given that Verizon has now completed the acquisition of Vodafone's (NASDAQ:VOD) stake in Verizon Wireless, it now expects higher margins and robust revenue growth this year. The buyout of the Vodafone stake is expected to be immediately accretive to Verizon's earnings, so an earnings beat is on the cards.

But more importantly, Verizon is now making some solid moves to accelerate growth, which is what investors should focus upon. Let's take a look at the various factors that could drive its outlook going forward and make Verizon a solid investment option.

Positive trends to continue

Verizon is making consistent and strategic investments to deliver high network quality, reliability, and a rich customer experience. It has been making significant investments in 4G LTE and is changing the way its customers interact with the world via next generation apps, devices, and solutions that will help the company increase volume and density in this segment.

Verizon has also entered into an agreement with Intel (NASDAQ:INTC) to buy media assets that will help the company develop cloud TV products and services. Verizon will purchase the intellectual property rights and other assets that Intel has in its cloud platform. This move will help it provide its video services integrated with Verizon's FiOS fiber-optic-networks.

Reaping the benefits of strong customer acquisitions

Verizon has already witnessed robust growth in customer acquisition in the last fiscal year. It had a strong 4.1 million new postpaid net additions and 4.2 million new 4G LTE smartphone customers. Verizon had also added 1.8 million new internet devices, with tablets achieving 1.5 million of this total. The company had also added 360,000 Home Phone Connect customers in the last fiscal year. Verizon expects that the growth in customer acquisition will result in greater profitability in the current fiscal year.

Verizon has invested concretely in its wireline segment too, improving its services, applications, and solutions in FiOS, global IP, security, and cloud services. The company believes that these strategic investments will result in higher efficiency and will lower the cost structure eventually.

With respect to the consumer and the mass market, Verizon sees a positive revenue trend for fiscal 2014. Having attained 6.4% growth in revenue in the consumer market last quarter, which was primarily driven by the increase in prices for FiOS, Verizon anticipates sustainable growth of 4% in this segment this year. Verizon is focused in acquiring new customers with its disciplined approach in a highly competitive market.

FiOS is expected to be the biggest driver in this segment. Verizon had picked up 126,000 new FiOS internet additions in the fourth quarter of 2013, and it expects the trend to continue. The company has a total of 6.1 million FiOS subscribers that represent 39.5% of total broadband penetration. Verizon had also added 92,000 FiOS Video subscribers in its wireline segment in the fourth quarter. The company has currently a total of 5.3 million FiOS Video subscribers, representing 35% penetration in this segment of the business. Such a dominating position and the addition of new customers should aid Verizon's earnings growth this year.

Verizon has also seen strong and robust growth in its cash flow. Cash from operating was up 23% in the last quarter, while free cash flow increased to $22.2 billion, up 45% year on year. Verizon has a total of $54.13 billion as cash in hand, enabling it to meet its dividend obligations. Also, since Verizon's payout ratio is 52%, the company can easily increase its dividend going forward, since it has a strong cash position.

Valuation and conclusion

At a trailing P/E of 12, Verizon is quite cheap when we see that the industry average P/E is 17.84. In addition, the company is generating strong cash flow as we saw above, while its operating margin of 26.5% is greater than its prime rival, AT&T (NYSE:T), which has a margin of 23.67%. Also, the acquisition of Vodafone's stake should give Verizon more flexibility to expand the business. All in all, Verizon looks quite well-positioned going into the earnings, and I won't be surprised if it performs well in the long run.

Source: Earnings Preview: Verizon Communications