One of the main tenets of successful investing is to find companies that possess a competitive advantage. This advantage gives the company a superior position over its competitors for a variety of reasons and creates a moat between the company and its competitors. This moat allows for pricing power which ultimately leads to profits. Verizon Communications (NYSE:VZ) is one of those companies that have a large competitive advantage due to the scope and quality of its network. Verizon is the largest mobile service provider with the largest 4G LTE network in the U.S., covering 97% of the U.S. population. In addition, Verizon is the only wireless carrier whose 4G network is 100% 4G LTE.
Recently-Ended Quarter's Performance
Verizon reported its first quarter financial results on April 24th, for fiscal year 2014. The company reported that total consolidated revenues were $30.8 billion reflecting an increase of 4.8% from the first quarter of fiscal year 2013. First quarter adjusted earnings per share were $0.84 cents also reflecting an increase of 23.5%, compared to the first quarter of 2013.
Source: Investor Presentation
Verizon's Wireless and Wireline segments reported strong results in the recently-ended quarter. Verizon's Wireless segment reported revenues of $18.0 billion, up 7.5% compared to the first quarter of 2013. Verizon's Wireline segment reported revenues of $3.8 billion reflecting an increase of 6.2% compared to the first quarter of last year.
Source: Investor Presentation
In addition, the average revenue per account "ARPA" of the Wireless segment increased by 6.3% to around $160 per month and average revenue per users of the Wireline segment increased by 11.3% to nearly $120 in the recent quarter. The results of the first quarter of 2014 also included the impact of February's close of the $130 billion transaction to acquire full ownership of Verizon Wireless.
Verizon is the only wireless carrier whose 4G network is 100% 4G LTE. It has significantly expanded its 4G LTE network to 95% of the US population in more than 500 markets covering approximately 305 million people. In addition, Verizon recently announced that it has completed its acquisition of Vodafone Group Plc's (NASDAQ:VOD) 45 percent indirect interest in Verizon Wireless in a transaction valued at approximately $130 billion. I believe the company's decision to acquire the full ownership of Verizon Wireless will further boost its top and bottom lines in the coming years.
Verizon Wireless is the leader in the U.S. wireless industry in network performance, profitability and cash flow. The company has gained a substantial lead over competitors by building up its advanced 4G LTE network. The Wireless segment will continue to be the growth engine for the company's profits as more people are using sophisticated services for smartphones. Furthermore, it is expected that mobile data traffic will grow at a CAGR of 61%, from 2013 to 2018, reaching 15.9 exabytes per month by 2018. This growth will further boost the company's position in the coming years.
Verizon continues to enhance its 4G LTE smartphone lineup, and at the end of the first quarter, smartphones accounted for more than 72 percent of the Verizon Wireless retail customer phone base, up from 70 percent at year-end 2013. In my opinion, all of these favorable factors will help the company reach 162 million retail subscribers by the end of 2018.
The Verizon Wireline segment, with fiber optic network technologies such as FiOS Broadband and FiOS Video, could drive significant growth as consumers are demanding faster data speeds, as well as greater and more diversified television and video content. FiOS is offered in varying downstream and upstream processing speeds, the fastest being FiOS Quantum which allows users to download data at up to 500 megabytes per second. The high-speed version of FiOS will put Verizon in a good position to meet the growing number of customers who power more devices and stream more videos. Although Verizon has no immediate plan to expand the FiOS internet, TV and voice service, it is looking to further penetrate the markets it already serves. By improving the quality of these services, the company will be able to obtain more market share. This will allow the company to expand its services to new markets in the future.
Estimated Revenues and Profits
The Verizon Wireless segment contributes a significant portion to the company's revenue, as shown in the following chart. My analysis shows that Verizon Wireless segment revenue will grow at a CAGR of 7.6% from 2014-2018 due to its strong presence in the market and recent acquisition of Vodafone. The revenues of the Wireline segment will not grow significantly in the next five years. In addition, the company has been effectively improving its cost structure to drive operational efficiency and the productivity of its entire business. I believe the company's cost-cutting initiatives will positively impact the operating and net margins. I have gradually increased the margins of the company in my analysis to reflect that fact and concluded that Verizon's operating margin will reach 31% in 2018.
Verizon is the largest wireless network operator in the U.S. and leads its competitors in the segment. In addition, the company performed well in the recent quarter and also has strong future prospects due to its recent acquisition of Vodafone and the solid growth of its wireless business. The company's cost-controlling initiatives and the increasing number of subscribers will further boost the company's top and bottom lines in the coming years. Furthermore, Verizon has a strong dividend yield of 4.30%, and the payout ratio is quite reasonable at 47%. In my opinion, Verizon is one of the best picks in the sector with solid growth prospects. Based on the above discussion I give the company a buy rating.
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