Verizon Communications (VZ) is firing on all cylinders right now. Verizon did not participate in a bidding war with AT&T (T) for T-Mobile and the merger was not kind to T-Mobile and AT&T, rejected as it was by the FCC in December 2011. Also in December 2011, Verizon signed a $3.6 billion deal with Comcast (CMCSA), Time Warner Cable (TWC) and Bright House Networks to acquire 122 advanced Wireless Services spectrum licenses that could potentially bring coverage to more than 250 million people in seven of the eight most elite markets. When the scrutiny is over, Verizon Terremark will be in prime position to accommodate subscribers going forward.
Update on Advanced Wireless Spectrum sale
In March 2012, executives from both sides appeared and testified in front of the Senate Judiciary antitrust subcommittee outlining the reasons for and against. Primarily, Verizon and Comcast believed it was nothing more than another choice for consumers and a fourth choice in the bundling of services, in which a consumer could either accept the discount or not depending on bundling services.
On the other side of the coin, Rural Cellular Association, which includes the likes of Sprint (S) and T-Mobile, argued that the merger is nothing more than a grab at market share, where if the deal is approved Verizon and AT&T would own 60% of the country's spectrum. There is an underlying tone of politics that could become involved in lobbying for the approval or disapproval of the sale of spectrum rights.
Free market supporters like Grover Norquist along with 13 other conservative groups and media policy organizations sent a letter to FCC Chairman Julius Genachowski to approve the deal. The petition by these groups urged Chairman Genachowski to permit a free market solution and avoid the intervention by the government. In May 2012, progressive media advocacy groups lined up behind Sprint and T-Mobile, as well as regional carriers, in asking the court to block the deal. Many of these same opponents of Verizon's deal were also instrumental in breaking the AT&T and T-Mobile merger in 2011.
Expect heavy lobbying from both sides in this ever-developing merger of communication giants ideas in the future, especially after last week. Senate Antitrust Subcommittee Chairman Herb Kohl sent an eight-page detailed letter to the Department of Justice and the FCC in which he expressed concerns over competition. One would think that the letter was encouraging to Verizon and the cable consortium because in recent suggestions to the FCC, Senator Kohl had asked for extensive conditions in the Comcast-NBC Universal deal and the outright refusal of the AT&T/T-Mobile merger. Verizon has suggested that it would sell some of its 700MHz spectrum in the A and B blocks but Guggenheim Partners', Paul Gallant believes Verizon will be asked to sell some of its Advanced Wireless Spectrum.
The FCC has also announced that it has extended its original 180-day review period and believes a final judgment on the case could come around August 7, 2012, but some believe it will be delayed until the fall.
I know that merger fees can be costly, but for the $3.6 billion Verizon wants to spend on the Advanced Wireless Spectrum when its rival AT&T paid $3 billion to T-Mobile. Well, there is only one war in the wireless business and that is for Advanced Wireless Spectrum. Sure, analysts concentrate on the numbers of users, smartphones sold, and data plans, but each one knows how important it is to also tie up your competitions' cash in court. Hey, if the technology giants can do it, so can the telecoms, after all it's a business line that is always being scrutinized by the FCC and Department of Justice with regards to antitrust legislation.
Many people have pointed out that Verizon's price to earnings is very high at 45 times earnings, but I think the analysis provided by Alex Planes vindicates the high price to earnings. Planes believes the proof is in the free cash flow and when stacked up to the likes of AT&T, Sprint Nextel, Frontier (FTR) and CenturyLink (CTL). His analysis is quite intriguing and to the point. If Verizon has a price to free cash flow of around 8%, I believe investors have much more to gain from the stock even at 52-week highs of above $42 per share.
Verizon has announced new pricing structures and only time will tell if higher revenues can be generated from the new policies. In addition, Verizon has also bolstered its cloud presence by integrating Terremark into the business, as well as announcing deals with EMC (EMC). Verizon believes that EMC and its hybrid version of the cloud is the flexibility that consumers need going forward. The hybrid cloud offered will allow Terremark to build out and standardize its private cloud service with EMC infrastructure.
Verizon's next earnings report is over a month away and will be announced July 18, 2012. The company's earnings in the first quarter had a 16% upside over analyst's projections. In July, Verizon is expected to earn $0.64 per share and that would represent another 12% increase year over year compared to the second quarter of 2011. But if Plane is correct, the most important number will be free cash flow and that is expected to rise to close $2 billion for the second quarter. Investors right now might be buying Verizon because of the dividend play that is above 4.5% and the dividend has grown 6% year over year since 2006.
There is downside with Verizon trading near its 52-week highs, but Verizon has traded within a $9 price range for over 18 months. The stock looks solid within the range of $32-$41 and as more turmoil in Europe erodes away global corporations, I believe Verizon will be buffered by the U.S. consumer. Analysts have a mixed picture on Verizon, with only 45% committing to a strong buy position, but almost all believe the stock should be held if an investor owns a position.
I expect the price will go up with investors seeking guaranteed dividend growth and shelter from the current mayhem in the markets. In my eyes, Verizon has good growth, an attractive dividend, innovative network capabilities and has strategically enhanced subscriber revenues by adding innovative services to its portfolio. I recommend buying Verizon today.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.