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  • Verizon Grossly Undervalued: Wireless Business Will Drive Growth  0 comments
    Aug 16, 2012 11:50 AM | about stocks: AAPL, S, SPY, T, VOD, VZ

    Verizon Communications Inc. (NYSE:VZ), the largest wireless carrier in North America, is a in a position to tap a multibillion-dollar opportunity from the latest smartphone revolution. The world of mobile devices is exploding, and powerful mobile devices are still in their infancy. The defining product of the smartphone generation, the iPhone, was released less than five years ago. Being an early mover in this latest technology boom, we believe an immense opportunity is just waiting to be tapped by Verizon.

    Smartphones Dominate New Phone Purchases in the US

    (click to enlarge)

    A new survey by Nielsen reveals that smartphones now account for half of all mobile phones in the US.

    Almost half (49.7%) of U.S. mobile subscribers now own smartphones, as of February 2012. According to Nielsen, this marks an increase of 38 percent over last year; in February 2011, only 36 percent of mobile subscribers owned smartphones. This growth is driven by increasing smartphone adoption, as more than two-thirds of those who acquired a new mobile device in the last three months chose a smartphone over a feature phone.

    You can read the full story here.

    Verizon's Compelling Fundamentals

    Verizon has an attractive fundamental outlook based on increasingly favorable growth prospects. The following points should be considered while analyzing the future growth of the company.

    • Expanding Subscriber Base: Verizon continues to increase its subscriber base and average revenue per user (ARPU). Its wireless unit gained a net 1.2 million subscribers in the second quarter of 2012 - a strong result in an industry where subscriber gains have tapered off now that nearly everyone has a cellphone. Of the new subscribers, 888,000 were on contract-based plans, which are the most lucrative. Verizon Wireless has 94.2 million retail subscribers. The profit margin at Verizon Wireless was the highest ever, as average monthly fees for contract-signing subscribers rose 3.7 percent to $56.13. Verizon is benefiting from the growing popularity of smartphones, which come with data fees.
    • Verizon Wireless Tops Industry in Customer Loyalty: For the ninth consecutive quarter, Verizon Wireless leads the industry in customer loyalty among U.S. wireless customers with postpaid contracts. With postpaid churn (turnover) of 0.84 percent, the company reported the lowest customer churn rate of any of the nation's major wireless providers in the latest quarter.
    • Improved Competitive Position: The rollout of 4G services along with the new devices, as well as iPhone will provide huge potential for future growth. Further, the company's expansion into cloud computing business through Terremark and CloudSwitch will boost its competitive position against its major rivals, AT&T (NYSE:T) and Sprint Nextel (NYSE:S).
    • Improved Product Cycle: The company has already launched many smartphone devices with more to be launched in the upcoming years. These will help them to increase its market share as well as retain customers.

    Verizon Emphasizing on Wireless Business

    The company operates in two segments, wireline and wireless. The wireline segment provides voice, internet access, broadband video and data to consumers. The wireless segment offers wireless voice and data products, and other value-added services, as well as sale of equipments.

    The launch of iPhone and other smartphones serves as negative catalysts for VZ's own wireline customers since more customers will convert to wireless in the near future. The wireline business also faces competition from competitive local exchange carriers, wireless carriers, long distance providers, and cable operators.

    The company is spending hugely to subsidize the iPhone, an effort to become the most dominant player in the smartphone and tablet revolution. While in the short-term this is surely affecting profits, these kinds of initiatives are undoubtedly long-term positive, especially when the wireline business is expected to generate flat revenues.

    Verizon Wireless: The Future of Verizon Communications

    Verizon Wireless leads the way with the nation's largest 4G LTE network, covering nearly 75 percent of the U.S. population; an extensive lineup of 4G LTE-enabled devices, such as the Samsung Galaxy S® III and DROID INCREDIBLE 4G LTE by HTC; as well as HomeFusion BroadbandSM, which provides high-speed, in-home internet access via the company's 4G LTE network.

    Verizon Wireless has invested more than $70 billion since it was formed - more than $6 billion on average every year - to increase coverage and capacity of its premier nationwide network and to add new services. Verizon Wireless is a joint venture with British mobile network operator Vodafone Group Plc (NASDAQ:VOD), in which VZ holds 55.0% stake while VOD holds the remaining 45%.

    (Source: CNBC, Forbes & MarketWatch)

    Verizon Communications: Share Price Outlook

    In the short-term the share price of the company is undergoing a mild downtrend as indicated by the RSI and MACD indicators. It's interesting to see if the 50-Day SMA holds. The 20-Day SMA is approaching southwards to cut the 50-Day SMA line. If the 50-Day SMA breaks, the stock could correct up to $41. We believe this correction is an excellent opportunity to enter the counter.

    (click to enlarge)

    The company's long-term growth rate ranges from 3.0% to 5.0%, with the average being 4%. Verizon enjoys a strong financial position with ample cash that will provide enough financial flexibility. The company continues to focus on maximizing free cash flow, maintaining a strong balance sheet and reducing debt.

    The chart at the right shows the returns to an investor from both price appreciation and dividends (dividends are assumed to be reinvested). Verizon Communications is up 36.84% over the last year vs. S&P 500 or its tracking ETF (NYSEARCA:SPY) up 22.60%, AT&T up 40.54%, and Apple (NASDAQ:AAPL) up 65.62%.

    Verizon is attractive for income-oriented investors based on its dividend yield of 4.5%. The company has paid a cash dividend to shareholders every year since 1984 and has increased its dividend payments for 7 consecutive years. The stock is currently trading at an estimated 2012 PE of only 17.70, there's plenty of room to grow for the stock. Given an attractive fundamental outlook, we expect the share price of the company to trade in the $53 to $57 range within a year.

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

    Stocks: AAPL, S, SPY, T, VOD, VZ
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