Verizon (NYSE:VZ), divided into the Verizon Wireless and Wireline segments, provides communication, information and entertainment products and services to consumers, businesses and government agencies worldwide. Its stock, currently trading around $41, is at its highest levels in over four years, and the company has quarterly revenue exceeding $28 million. Trading at its highest level in years, the question is where does the stock go from here? Quite simply, I believe the answer is higher. Let's take a look at where the company stands in regard to its competition and what the future holds…
A 2D Story
Wireless communications. Wireline communications. Equipment. Entertainment. What do they add up to? Diversification. Along with being a nice little Business School term, it's one of the two "Ds" that separate Verizon from its competitors. How people are entertained, how they connect with one another - these are constantly evolving themes in today's world. And these evolutions are what make Verizon's diversification so crucial to its long-term sustainability and success.
As with almost any maturing industry, wireless communications has turned into the land of the giants. Verizon competes in this space with AT&T (NYSE:T), Sprint Nextel (NYSE:S), and the privately held T-Mobile, a one-time acquisition target of AT&T. Growing revenue by 8% in the first quarter of 2012, wireless has turned into one of the company's strongest and most reliable sources of revenue growth, as consumers continue to demand larger data and messaging plans. What separates Verizon in wireless is, quite simply, our second "D": Differentiation. Differentiation in the form of: i) The largest and most reliable cellular coverage; and ii) the rapid roll-out of its 4G LTE data network. A common quip goes something like, "I'd switch to AT&T, but I actually want to be able to use my phone to make calls." In fact, in a recent study by the independent J.D. Power and Associates, Verizon was judged to be the overwhelming leader in network quality performance. Its track record of success - it was the 15th consecutive reporting period in which the company was ranked highest in the Northeast, for example - leads to a loyal customer base.
While the company's cellular coverage is a big reason Verizon keeps customers and a key selling point to new customers, what about the increasing revenue segment of wireless data? 4G, what company really has it, which is the best at it? Wireless companies certainly make a lot of spurious claims about their networks, but when you sift through all of the assertions, you're left with one indisputable fact: 4G LTE is much different, and better, than other "4G" service. And, currently, Verizon and AT&T are the only wireless providers that offer LTE connection speeds. Not only that, but Verizon's LTE network is currently a lot larger than AT&T's, available in more than 200 cities throughout the U.S., versus only about 30 cities for AT&T. You might be asking yourself why I'm rambling on about the minutia of 4G and LTE in an investment column? Because in a world distinguished by the ever-increasing need for rapid access to data, Verizon provides it better than anyone. This, along with its best-of-breed cellular coverage and reliability, wins it wireless customers, which increases revenue, which increases shareholder profits. Verizon has consistently shown that the company is more in-touch with the needs of consumers than its competitors.
Verizon's largest competition in wireline - home phone, internet, and cable television - comes not only from AT&T, but from large regional cable providers, such as Cablevision Systems (NYSE:CVC) and Time Warner Cable (TWC). Verizon's service to wireline consumers, however, is more of the same, best-of-breed. The company again differentiates itself from the competition with its fiber-to-the-premises (FTTP) service, branded as FiOS. Although there are are not currently a ton of applications that noticeably showcase the difference in speeds, FiOS is faster than standard cable lines when it comes to both download and upload speeds. Laying thousands of miles of fiber optic cable has been a slow process for Verizon, but it's an investment that I believe will pay off in spades. Bandwidth greedy consumers are requiring more every year, downloading entire feature-length films to their laptops and smartphones, instead of simply poking around for current news.
Entertaining the masses
In its never-ending quest for - here's that first D word again - diversification, Verizon announced in February a joint venture with Coinstar (NASDAQ:CSTR), the owner of the self-serve DVD kiosks branded as Redbox. The two companies are set to begin a partnership in the second half of 2012, whereby Redbox gains the benefits of Verizon's on-demand streaming video, and Verizon gains access to Redbox's growing kiosk customer base. Verizon owns a 65% majority ownership share in the joint venture. This partnership will put Netflix (NASDAQ:NFLX) squarely in its crosshairs.
I believe the company's push into entertainment will continue, and I believe it's another smart move for the telecom giant.
I would be a buyer of Verizon at a current price around $41. Its management team has repeatedly shown the foresight to spread its resources around, and put it in optimum position to capitalize on market trends and consumer demands. I believe that consumers are willing to pay a few dollars extra each month for wider calling areas and fewer dropped calls, for faster data. With Verizon's stock at the highest level it's been at in nearly half of a decade, I think investors see the same value in the company that its customers do. With a dividend yield of over 5%, Verizon meets all of my requirements for a buy-and-hold stock. It's not going to outpace the shining stars in your portfolio, but it's not going to disappoint you either. Based on my research, I think the stock could reach $45 by mid 2013.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.