Verizon (VZ) is the nation's largest 4G LTE network, as anyone who watches television can attest due to the company's ubiquitous commercials. It is also expanding its network at a brisk pace as it recently entered its 400th market. The Verizon 4G LTE network now reaches almost 80% of the U.S. market. As consumers begin to use their mobile devices more often for data it stands to reason that Verizon's consumer base will grow. In the last 3 months, Verizon has activated 6.5 million smartphones, the second most activations in a quarter in its history. That number could have been even higher had Apple (AAPL) not had supply issues with its new iPhone 5. The company also added over 1.5 million new customers in its wireless division and saw its profit margin rise by 50% over the last quarter. Times are good for Verizon shareholders and they will only get better going forward.
Not only will the number of mobile devices continue to increase worldwide, but mobile data usage will continue to steeply rise in the coming years. By 2016 there will be more than 10 billion devices in use and mobile data traffic will increase 18-fold by that time. It is clear that wireless data suppliers are poised to capture this growth and Verizon's 4G coverage positions them at the top.
One knock against Verizon is its P/E ratio which currently stands around 45. Based solely on this it is tempting to think Verizon is overvalued. Compared to its peers, however, Verizon is not out of line with its ratio. AT&T (T) has a P/E ratio of over 47, while Sprint (S) is not profitable. When you combine this with the fact that the telecommunication sector has seen the third best growth in the S&P 500 it is clear that Verizon is more than a safe pick, it is going to continue to grow.
Recent news will also help Verizon going forward. Verizon announced earlier this year that it is buying Hughes Telematics. This will prove to be a great move as it diversifies the company into the GPS and auto safety sector. This acquisition will drive significant growth in the next couple of years and I do not believe the stock price reflects what a nice acquisition this was for the company. Verizon also recently announced that it had settled a lawsuit brought by TiVo over licensure of TiVo's digital video recording technology. The end of this lawsuit only helps Verizon's stock price going forward, as it was a deterrent to investors.
The declining land line market has led to Verizon laying off thousands of employees in its wire line division, most recently a buyout offer to 1,700 employees. This is tangible proof that Verizon is shedding any remaining focus it had on the slow growth wire line sector. This is good news for shareholders as the focus should be shifting from slow or no growth in wire lines to the rapidly expanding mobile device data arena. The fact that Verizon is laying off and/or buying out employees is not bad indicator for its stock, quite the opposite - it's a good business decision that will reward shareholders into the future. A good management team is able to respond to trends in the business environment and this is a great example of a good management decision.
Some concern for Verizon going forward is in the area of consolidation within the telecommunications industry. Deutsche Telekom has decided to merge its U.S. operations with Metro PCS (PCS), while Sprint is merging with Japanese based Softbank. These mergers will no doubt make T-Mobile and Sprint stronger competition for Verizon and AT&T in the U.S. wireless market. With increased cash derived from the mergers both T-Mobile and Sprint will be better equipped to offer the devices that consumers want. However, I do not think Verizon has much to worry about. Verizon has such a large lead in developing their 4G network across the country that the two better prepared competitors will still be so far behind.
While device purchases are important, they are so heavily subsidized that the margins are small. Margins are higher with the data plans. Any consumer planning on using data with their mobile device will put Verizon at the very top of their list going forward for years to come. A stronger Sprint and T-Mobile might, and I emphasize might, shed some Verizon customers who do not need much data from their devices and are looking more for voice plans and text messaging. But that is not a very profitable base of customers. Furthermore, the more likely competitor to be hurt by these recent mergers is AT&T, whose data coverage is not nearly as extensive as Verizon. Verizon will not see any significant decline because of these mergers.
Verizon might not be the sexiest stock out there to pick. But it has the mobile data network that is second to none at a time that mobile data usage is exploding and will continue to grow for at least the next 3 or 4 years. The company recognizes that wire line is an area that is slow-growth or no growth and is shedding away that part of their business. At the same time it is diversifying as its acquisition of Hughes Telematics demonstrates. Verizon is a solid stock that will continue to offer investors solid returns for the next several years.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.