Analysts Neutral on Verizon Despite Terremark, iPhone Deals

Includes: TMRK, VZ
by: Alacra Pulse Check Blog

By Sheena Lee

Analysts offered mostly positively comments on Verizon Communications (NYSE:VZ) after its promising revenue forecasts, the arrival of the iPhone and the planned acquisition of information technology service company Terremark Worldwide (NASDAQ:TMRK). Nevertheless, as a group they don’t see any upside in the company’s stock price over the next 12 months.

The median price target based on 15 analysts tracked by Alacra Pulse is $35, up from $34 in November. The mean target is $35.60, virtually the same as Monday’s closing price of $35.62. Of these analysts, five have a positive rating, eight are neutral and two are negative.

Current 12-month price targets of selected sell-side and independent analysts. Click image to enlarge.

Kaufman Bros. analyst Ben Abramovitz said the purchase is good news for Verizon shareholders, as he forecasts that Terremark’s revenue will grow 25 percent next year.

The proposed acquisition represents Verizon’s enthusiasm to rapidly enter the market for corporate IT services delivered over the Internet rather than an in-house IT department, said Zacks analysts “Verizon is seeking to expand its advanced business in order to offset declining revenues from traditional fixed lines. The proposed deal supports Verizon growth initiative in remote or cloud computing, an area where it has been lagging competitors like AT&T (NYSE:T)”.

Piper Jaffray analyst Christopher Larsen said that the Terremark deal won’t move the revenue needle for Verizon initially, but in the long run, it’s clear the carrier’s competitors are going to be buying their way into the cloud business. Larsen has a $32 price target on the telecom company.

Goldman Sachs analyst Jason Armstrong upgraded Verizon to Conviction Buy from Buy and has a $42 price target, while FBR Capital’s David Dixon maintains a Market Perform on the telecom giant and raised his price target estimate to $34 from $30.

RBC Capital Markets analyst Jonathan Atkin increased his 2011 net subscriber additions estimate for Verizon to 6.75 million from 5.06 million. “We believe majority of switchers to VZ’s iPhone will come from AT&T, with a lesser contribution from Sprint and T-Mobile,” Atkin wrote in a note to clients. Atkin has an Outperform rating and price target of $35 on Verizon stock.

UBS analyst John Hodulik said Verizon could sell 13 million iPhones this year, which would mean a price tag of about $5.2 billion for the carrier. However, their margins could be hurt in the short-term as they spend money to subsidize iPhone for customers, said Craig Moffett, an analyst at Sanford C. Bernstein & Co. But the product will ultimately drive customer growth and higher bills, said Moffett, who has an Underperform rating and low $25 target.

At the other end of the scale, Macquarie’s Kevin Smithen initiated coverage of Verizon on Jan 12 with a Buy rating and $43 target. “With a VZW dividend announcement likely in December 2011, we believe the company is poised to increase cash returns to shareholders in 2012, ” he wrote.

Verizon said that it has seen more customer growth, and Philip Redman, an analyst at Gartner, said the new additions were “respectable,” but added, “there’s no doubt that the high penetration of the U.S. market means slowed subscriber additions.”

Todd Rosenbluth at Standard & Poor’s reiterated a $32 target but recommends selling Verizon: “While we are encouraged by the relative stability in VZ’s wireline segment during 2010, helped by FiOS gains, and by the company’s dividend, we view the shares as overvalued.

Sources: Alacra Pulse, New York Times, Zacks, SmartTrend, StreetInsider, Computer World, Bloomberg, ZDNet, IB Times