Verizon Will Soar Above $40 By 2013

| About: Verizon Communications (VZ)

The telecom industry is one of the fastest growing industries today both in terms of business as well as competition. With the advent of wireless communication, the business model of telecom industry has altered drastically from once profitable "wireline" telephones to the now profitable wireless versions. Verizon (VZ) is one of the global giants in this industry, having some of its roots from the break-up of AT&T (T) in 1984. The company operates primarily in two segments, namely Verizon Wireless and Wireline, with presence in about 150 countries worldwide.

In terms of its market capitalization of about $106 billion, Verizon is the second largest telecom company in the US, next only to AT&T. It has also a good business profile and has tied up with various overseas operators, like Tata Communications Limited (NYSE:TCL), for enhancing its reach in the telecom space globally. Its common stock, having a low beta of about 0.4, has been devoid of any volatility in spite of the global uncertainties, making it an ideal investment option for the pensioners.

Verizon is one of the few companies which has also started offering a range of 4G-enabled devices and services apart from its 3G services. In its efforts to expand its network and services, the company acquired Terremark Worldwide in April 2011, CloudSwitch in August 2011 and purchased some operating assets from United States Cellular Corporation in March 2012. Further, the company also offers video service over its fiber-optic network having a customer base of over 13 million and cloud services bringing in good revenue in addition to its telecom business.

In this business field, Verizon mainly competes with two more giants, AT&T and Sprint-Nextel (NYSE:S). In both wireless telephony and overall subscriptions, Verizon beats both these companies and is currently the leading provider in US with over 108 million wireless and 145 million overall subscribers in comparison to AT&T's 100 and 110 million and Sprint-Nextel's 53 and 33 million.

Even when we compare these three companies in terms of gross margins, Verizon, at about 58%, stands ahead of AT&T's 54% and Sprint-Nextel's 43%. Telecom companies can also be compared with respect to their "Average Revenue per User" (ARPU). In this comparison, Verizon is also ahead of its competitors at about $55, compared to AT&T at $48, and Sprint-Nextel at $46. Thus, the company has been showing higher profitability vis-à-vis its competitors on all accounts.

Further, Verizon, like the AT&T, is also selling iPhones bundled with its network plans through its tie-ups with Apple (NASDAQ:AAPL). Though the company loses a substantial amount of money through this contract with Apple, but it is likely to make good the same over a period of time through its service plans.

Because it has a trailing twelve months EPS of $0.85 as against an industry average of $0.55 and a P/E ratio of about 44, it is a competitive stock in this segment. Along with this, the company has been able to provide a dividend yield of about 5.4% making it an attractive proposition for investment.

Verizon generated revenue of about $111 billion in the year 2011 with an operating margin of about 17% against an industry average of only about 12%. This resulted in having a free cash flow of about $13.5 billion which is re-invested in the business for further growth, making the future of the company extremely lucrative for its investors. High investments in this ever growing segment are meant to increase its competitiveness and profitability.

With a healthy net income of about $2 billion, Verizon is next only to AT&T in this industry. Further, the stock also has an extremely low Price/Earnings to Growth (NYSE:PEG) ratio of 1.21 beating that of its competitor AT&T (1.68) and the industry average (1.56). These make the valuations of its common stock cheaper than most in the industry.

However, the company faces significant risks in its business due to growing competition and falling service rates. Though, there has been a significant growth in its revenue from $108 billion in 2009 to about $111 billion in 2011, the EPS has reduced from $1.73 in 2009 to $0.85 in 2011. This reduction in earnings clearly depicts the growing competition and lower profitability for the sector.

To enhance this profitability over a longer term, the company has entered into various contracts with major device manufacturers to provide communication devices bundled with various usage plans at attractive prices. In the future, if this new business strategy fails to impress consumers, the company faces inherent risk of high losses.

Since Verizon has been a favorite in the past for its investors due to its high stability and good dividend yield, this scenario is likely to continue in the future. Further, the company's efforts to diversify its business in various fields other than pure telecommunication also augur well for its investors. The launching of 4G services and continued penetration in the international market with various products can only make the company bigger in the years to come.

In my opinion, investors with low risk appetite, who desire a good growth in their investments, should invest in this company's common stock. Though the company may not provide adequate appreciation of their investments in terms of the stock prices, but it will surely provide higher dividend yield than the current 5.4% always and every time. Even for short-time traders, I recommend a buy whenever there is a pull back in its price (below $35) for surety of trade in its favor.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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