Verizon To Remain Strong Heading Into 2013

| About: Verizon Communications (VZ)

The telecom business is burdened with capital requirements and expenditures that continue to strain the margins of carriers that offer voice, broadband, television, wireless and managed services. The competition is particularly fierce in the broadband and wireless space as new hardware offerings and customer demand for more and better service bundles continue to be impacted by capacity issues and service requirements.

Lately, several telecoms have taken steps to address the challenges of capacity, capital expenditures and improving margins. Verizon (NYSE:VZ), one of the top three carriers in the U.S., along with its closest competitor AT&T (NYSE:T), have started to show some promise in the areas of increasing margins. These two companies are largely viewed as investments with promising futures.

Barron's reported that Credit Suisse upgraded its rating to outperform on Verizon as well as AT&T. Credit Suisse believes that the behavior of wireless carriers is changing with telecoms showing growing discipline about pricing and less reliance on non-recurring or diminishing revenue streams from subsidies. Credit Suisse expects to see improved margins and earnings growth for all carriers in 2012. Costs and capital expenditures to expand wireless capacity from the proliferation of smartphones have had a negative effect on revenues and returns. Credit Suisse is expecting earnings per share of $3.02 for Verizon in 2012. The increase will come from wireless margin expansion.

Verizon's common shares trade around $41.40. The year low for the stock is $32.28. The year high is $41.96. The company has earnings per share of $0.93, a price earnings ratio of 44.41, and a dividend yield of 4.8%. Verizon has total cash of $6.54 billion and total debt of $51.6 billion. The book value per share is $12.91.

First quarter 2012 results showed Verizon increasing wireless service revenues by 7.7%. Earnings per share in the quarter were $0.59 per share, compared with $0.51 per share in the same period last year. The company increased operating cash flow to $6 billion, compared to $922 million in the first quarter of 2011. The growth rate of retail service revenues of 8.9% were at their highest in three years. Data revenues were up 21.1%. The company added 734,000 retail customers for a total of 93 million. The company added 193,000 wire-line Internet customers and 180,000 video clients. There was a net increase of 104,000 broadband connections from the fourth quarter of 2011. Verizon also saw an 8.1% increase in average revenue per user. 63% of consumer revenues were generated by wire-line FiOS.On top of this, the company saw an 11.6% increase in strategic services, which accounted for 51% of global enterprise revenues. Verizon decided to change its enterprise solutions to provide for better service to high growth markets. Verizon expects that its business solutions will be contributing more overall wire-line revenue growth in the future.

The wireless 4G retail customer base increased 9.1% from the first quarter 2011 to the first quarter 2012. Wireline revenues grew by 1.7% in the first quarter from the previous year. Wireless capital expenditures in the first quarter were $1.9 billion, compared to $2.7 billion in the first quarter of 2011. Global enterprise revenues were up 0.9% from the first quarter of 2011. Sales of cloud services, IT solutions and networking increased 11.6% in the first quarter of 2012, compared to the same period in the previous year. Verizon's dividend of $0.50 remained unchanged from the previous quarter.

FiOS market share continued to increase and was at 36.4% in the first quarter, compared to 33.1% at the end of the first quarter of 2011. Broadband connections posted a 3.3% increase from the same period in the prior year, totaling 8.8 million. The increase of 104,000 broadband connections was the highest total addition since the second quarter of 2009. Verizon introduced a high speed home internet service using the 4G LTE network in the quarter. This will provide areas with limited broadband options a reliable and fast alternative. Verizon continued to expand its 100 gigabit per second network, allowing more network routes domestically, and two more routes in Europe.

Verizon's global business and government solutions for cloud and tech entered into agreements in the first quarter to develop solutions in mobile and electronic health records management and e-subscriptions. In addition, the company is providing digital signage for retail customers supported by the 4G LTE network. It unveiled new solutions for long distance transmission of computerized information for the automotive and transportation industries, while also introducing a cross platform to serve open video communications. During the quarter, the company announced a joint venture with Coinstar for a solution providing video entertainment in a convenient and simple way for new release DV and Blu-rays as well as on demand content streaming and downloads from Verizon's platform. The joint venture will commence in the second half of 2012.

Since mid April, Verizon's wireless network has covered more than two thirds of the U.S. population, making Verizon the leader in the 4G LTE industry. Verizon predicts that by the end of 2012 it will make 4G LTE available in more than 400 U.S. markets available to 260 million people. During the rest of 2012, Verizon will also be selling wireless spectrum (all of its 700 MHz A and B spectrum), in order to reorganize its spectrum holdings. The company holds licenses in major cities across the country, as well as in smaller and rural markets. This spectrum was acquired in an FCC auction in 2008. Verizon will also be attempting to acquire Advanced Wireless Services spectrum licenses, it will use AWS spectrum with its 700 MHz C band spectrum to deploy additional LTE capacity. Cell phone networks use a portion of ultra high frequency (UHF) for transmission and reception. UHF is shared with television, Wi-Fi and Bluetooth transmission. Lower frequencies provide coverage over larger areas. Higher frequencies provide more service to customers in smaller areas.

The company had 93 million retail customers at the end of the first quarter, which included 88 million subscribers and five million pay as you go wireless customers. Smartphones represented 47% of wireless retail subscribers, up 3.5% from the fourth quarter of 2011. Retail subscriber churn improved .96%, an improvement of five basis points from the previous year. Verizon Wireless introduced five new 4G LTE devices and continued to roll out its 4G LTE mobile broadband network, the largest network in the U.S. which can service more than 200 million people in 230 markets across the U.S. Verizon offered products from Droid, Motorola (NYSE:MSI), LG, Samsung (OTC:SSNLF) in addition to the Apple (NASDAQ:AAPL) iPad that it introduced in mid-March, 2012.

In the U.S., carriers have started to tighten upgrade policies and implement upgrade fees. Upgrade volumes and device subsidies are thought to be in decline after years of phenomenal growth, which will have a positive effect on margins. Ceasing the cell phone subsidies may sound like a good idea in theory, but in practice, not so much. Vodafone Group (NASDAQ:VOD) and Telefonica (NYSE:TEF) stopped offering cell phone subsidies in Spain to increase profitability. Instead, the lack of discounts resulted in diminished cell phone sales. In the past customers could purchase an Apple iPhone for $250 and sign a two year contract. Without the subsidy, the phone retails for $800.

Additionally, the market for smartphones in Spain is not growing at the anticipated rate. Research indicates that high unemployment and massive debt will decrease the rate of smart-phone rates in Spain to 7% of the mobile market down from 21%. Reduced smartphone sales will have a negative effect on the carriers as well as the manufacturers. In the U.S. wireless providers are taking a less drastic approach using increased upgrade fees to reduce the annual subsidies.

The growth and reach of multi-faceted telecom companies provided a lot of confusion and upheaval in the industry for the last 20 years. The advent of wireless and broadband changed the landscape from telecoms being a simple voice transmission solution to an industry that provides a multitude of products and services over a broad customer base. Expenditures and investment in new and better transmission methods and capacity have seen these companies switch concentrations from home, to business to managed services, to entertainment delivery in order to remain relevant and to provide growth for investors.

It appears that these companies are now becoming more adept at measuring the impact of new and disruptive technologies and services. The larger telecoms that provide diversified solutions have managed to properly weigh the outcome of capital investments in different disciplines within the telecom space. Verizon is one of these companies, and is showing promising numbers and promising prospects resulting from its ability to maximize growth in each of its market segments. Verizon is now trading like a utility stock. Barring any macro-economic catastrophe, there is no anticipated price volatility. The company trades at a respectable volume, which allows dividend buyers to get in and get out with little downside risk.

Verizon is trading near the top of its 52-week range. As the new growth sectors are beginning to have a positive impact on the growth of the company and more analysts are taking notice, this presents a buying opportunity. I anticipate the stock will reach new highs between $42 and $43 by late 2012 and into 2013. With its performance lately, Verizon is easy to like and is a good investment for investors who want a telecom utility in their portfolio.

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

About this article:

Tagged: , , , Telecom Services - Domestic
Want to share your opinion on this article? Add a comment.
Disagree with this article? .
To report a factual error in this article, click here