Verizon: One Of The Best Picks In The Sector

Jun.13.14 | About: Verizon Communications (VZ)

Summary

Continued growth from wireless as well as FiOS will enhance revenues, as well as cash flows of the company.

The telecom sector has shown steady gains after the recent slump, due to fears about price competition in the sector.

Increased penetration rates of FiOS will allow the company to continue growth at high rates in the FiOS segment.

The slump in the telecom sector due to the fear of increased price competition created a great opportunity for long-term investors in the sector - stocks like Verizon (NYSE:VZ) and AT&T (NYSE:T) went down as much as 6.5% and 10%, respectively. Sprint (NYSE:S) went down over 27%, and still remains down about 20% year-to-date. However, Verizon and AT&T have recovered almost all the lost value, and both of these stocks are down just 0.20% and 0.90% respectively, year-to-date.

The market seems to be happy with the performance of Verizon, as the stock has shown steady gains since the start of last month. In our previous article, we have discussed the company's stance and measures taken in the ongoing price wars among telecom companies. However, this article focuses on the current financial standing of the company, along with a strong growth driver - FiOS - which will contribute in the long-term growth of the company.

FiOS - The Next Big Thing

When it comes to telecom companies, Verizon has a compelling edge over other market players due to its service quality. The company earned top honors in its reliability and speed index, data and call performance services in its major markets. The company also reported double-digit growth in revenues and earnings per share in the first quarter. This substantial growth is mainly driven by wireless and FiOS services during the period. Verizon's FiOS is a high-speed broadband connection based on a fiber optic network. FiOS revenues increased 15.5% year-over-year, with 98,000 FiOS internet and 57,000 FiOS video net additions in the first quarter. Therefore, the operating revenues for the first quarter stood at $30.8 billion, which is up 4.8% year-over-year and remained the company's highest quarterly growth rate in the past five quarters.

The company also continues to gain subscribers, as well as increase average revenue per account (APRA) - the key metric for a telecom company. Verizon's retail subscribers increased to 103.3 million, which is up 4.4% year-over-year, while its APRA increased to $160, up 6.67% year-over-over. This has shown that the company does not only go all-out to deliver the best service quality, but also managed to record consistent higher revenues during the first quarter.

As mentioned in our previous article, the FiOS subscription rate will likely increase in the coming quarters, and will result in substantial profits for the company's wireless business. Therefore, FiOS revenues, representing 74% of total consumer revenues, grew by 14.6% year-over-year, and for the first time, total quarterly FiOS revenues surpassed $3 billion in the first quarter of 2014. Moreover, the FiOS penetration rates also increased, which enabled customers to also subscribe to FiOS Quantum Internet service - which provides speeds ranging from 50 to 500 Mbps. FiOS will remain profitable for the company in the coming years, and has been successful to offset declining revenues from landline connections in Verizon's wireline segment.

The Best Wireless Network in the Country?

Verizon has the largest 3G and first-class 4G-LTE networks of any service provider in the U.S. However, the company's CDMA-based 3G network still needs a lot of improvements when compared to rival 3G networks. But this is the reason why Verizon has invested so much time and effort to build a first-class LTE network nationwide. Wireless networks are similar to highways - the more lanes we add, the more internet traffic will be passed swiftly. Initially, Verizon's network had the advantage of being on the 700 MHz band which, due to its unsurpassed coverage, helped the company to blanket the whole nation, including rural areas with LTE service. This also enabled the company to take the fastest LTE network title from AT&T for the current year and increase its LTE deployment over its Advanced Wireless Services (AWS) spectrum. The AWS spectrum, which operators have branded XLTE, complements Verizon's 700 MHz LTE coverage in the rural areas, and also boosts XLTE speeds and doubles the capacity of its high-speed 4G-LTE network in major cities.

Conclusion

The services of the company continue to differentiate it from its competitors - the company has the largest wireless network in the country, and leads its competitors in the segment. As a result, the wireless segment continues to be the biggest contributor toward revenues, as well as the cash flows of the company. Continued growth in wireless as well as FiOS will continue to push the company forward, and the stock price will continue to show an upward trend, in our opinion. We believe Verizon is one of the best picks in the sector, with solid growth prospects.

Additional Disclosure: This article is for educational purposes only and it should not be taken as an investment recommendation. Investing in stock markets involves a number of risks and readers/investors are encouraged to do their own due diligence and familiarize themselves with the risks involved.

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