Verizon Communications Inc. (NYSE:VZ) reported its third quarter earnings yesterday, which showed that despite the earnings and revenue growth over the previous quarter, the company didn't provide any earnings surprises, and revenues generated were in line with analyst expectations. The company reported earnings of $1.59 billion on revenues of $29 billion. EPS was recorded at 56 cents, which represents an improvement of 14% from the third quarter of the previous year. The company delivered good growth through its wireless segment, with increased sales of the iPhone and smartphone usage by customers led to the increase in overall revenues generated per customer.
The company's wireless segment continues to show good growth in terms of customer additions; however, margins based on EBITDA remained more or less flat from the third quarter of the previous year. The company was able to add a total of 1.5 million postpaid customers, which is a significant improvement over Q32011's net postpaid adds of 0.9 million. The company has some attractive wireless products in its portfolio, which includes Samsung's flagship smartphone, Galaxy S3, as well as the new iPhone 5, which is setting new sales records. Increased smartphone sales and more customers using their smartphones for downloading music and video streaming purposes led to the impressive growth in postpaid customer base. Moreover, since the recent introduction of Verizon's Shared Data Plan, which lets subscribers connect multiple devices to share data under one plan, the company has been able to derive more revenues per customer. Since the introduction of the aforementioned plan, Verizon has introduced a metric, average revenue per account instead of the commonly used average revenue per user, which rose by almost 7% as compared to Q32011 on a comparable basis. Retail postpaid churn improved by 3 basis points YoY and has been consistently improving largely due to its high speed services and wider market coverage. As mentioned previously in our report, Verizon has the highest market coverage when it comes to the 4G LTE network, covering over 300 markets, and as of the quarter ended September, 2012, that coverage has increased to over 400 markets across the U.S.
Verizon's wireline business, like other telecom players in the region, has continued to show weakness in terms of dropping revenues and margins, and that is largely due to wireless substitution. Total wireline revenues dropped by over 2% to $9.9 billion due to the dropping voice connections. However, its widely popular FiOS triple play service is helping the company in maintaining stable margins for its wireline business. The company added 136,000 FiOS net connections and 120,000 TV connections in Q32012, which is an improvement of 14% and 15% over the previous quarter. FiOS services account for more than half of the company's wireline revenues, and going forward, it will continue to be the growth driver for the segment.
Overall, the weakness in Verizon's wireline results was offset by the company's wireless segment, which showed improvement due to increased smartphone sales and usage as well as its data plans, which increased customer bills in the quarter. The trend can be expected to continue in the coming days, as smartphone penetration rises further. However, from an investment point of view, the stock is overvalued as reflected in almost all its multiples. VZ is trading at a price to sales multiple of 1.2x, which is a premium of approximately 200% over Sprint (NYSE:S). Moreover, on a price to earnings basis, the stock is trading at levels higher than its historic average, which further suggests that the stock has limited upside potential. Its P/E is in line with its competitor AT&T (NYSE:T).
However, the stock remains attractive from a dividend standpoint considering the current low yield environment. VZ currently yields 4.8%. The stock is currently trading near $45, down almost 3% since our last report, and based on the overvalued multiples and limited growth potential for the company, we suggest investors wait for a better entry point.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Business relationship disclosure: The article has been written by Qineqt's Telecom Analyst. Qineqt is not receiving compensation for it (other than from Seeking Alpha). Qineqt has no business relationship with any company whose stock is mentioned in this article.