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Verizon: The Best Network For Investors?

|About: Verizon Communications (VZ)

Summary

A recent network quality report by RootMetrics established Verizon (NYSE: VZ) as the premier mobile network in the US.

If the mobile segment’s contribution to Verizon’s portfolio increases to 75%, it could imply a further $2.5 billion upside to revenues.

The company has recently divested from Wireline operations and cell phone towers in a deal worth $15 billion.

The defensive nature of the company’s stock will hedge investors from potential downsides while the undervaluation of the shares does provide room for share price growth.

The company might not be an attractive prospect for short term investors but long term investors should consider buying into and holding on to the company’s stock.

A recent network quality report by RootMetrics established Verizon (NYSE: VZ) as the premier mobile network in the US. The company maintained its position as the leading wireless network in the country according to consumer-based qualitative data collected by RootMetrics for the second half of 2014. The company has been leading the market in terms of its data center performance, call performance along with speed and reliability. Verizon has thus cemented its position as the market leader and its position cannot be chalked up merely to the numbers it generates but also the satisfaction it provides to its customers. The company has generated solid revenue growth over the course of the last 4 years but its earnings growth has not been consistent. The company has struggled with its operational efficiency amid rising network costs. Verizon's share prices have remained relatively flat over the course of calendar year 2014 if beginning prices are compared with year end prices. Investors have remained uncertain as the company's earnings performances have remained inconsistent. Share prices have fluctuated considerably over the course of the year amid investor uncertainty.

Future growth prospects for Verizon

It would not be wrong to say that Verizon's mobile segment is the crown jewel of its network portfolio. Revenues from the company's mobile segment contribute 70% of the company's total revenues. The mobile segment is expected to propel Verizon's growth prospects moving forward. However, the company will have to focus on enhancing operational efficiency in order to generate positive investor sentiment for long term investment. The company's share of monthly mobile subscribers is expected to increase to 38% over the course of the next 5 years. Furthermore, the company's LTE network is expanding and as the demand for high speed access on the go rises, Verizon is positioned strongly to tap the potential that exists. Taking into account a 70% contribution of mobile revenues to total revenues and an estimated growth of 5%, I estimate incremental revenues of $6.35 billion in FY 2015. The company has to focus on its efficient operations if it is to drive long term growth. The company has recently divested from Wireline operations and cell phone towers in a deal worth $15 billion. Wireline operations account for a smaller proportion of earnings so divestments from non-core wireline assets and an increasing shift in its portfolio towards the wireless will drive long term growth for the company. If the mobile segment's contribution to Verizon's portfolio increases to 75%, it could imply a further $2.5 billion upside to revenues. Furthermore, the company's divestments will also generate cash for investments into efficiency improvements for its mobile services. The cash can also be used to reward investors through dividends and to drive up share prices and add value to investors through share repurchases.

Verizon as an investment case

From an investors' point of view, it is important to note that Verizon's shares are trading at almost 20 times its earnings, lower than that of major competitor AT&T (NYSE: T). The company has a strong and consistent dividend payout tradition and an impressive dividend yield of almost 4.5%. Using the constant growth dividend discount model, taking into account dividend growth over the course of the last 4 years and a return to capital of 4%, I estimate a $55 target for Verizon's stock thereby indicating a potential upside of almost 11% as compared to the current market price. This cements the long term growth prospects in store for Verizon. Furthermore, taking into account a risk free rate of 0.25% prevalent in the US economy, I estimate a beta of 0.3 for the company's stock. The defensive nature of the company's stock will hedge investors from potential downsides while the undervaluation of the shares does provide room for share price growth. The company's current market cap amounts upwards of $200 billion.

Conclusion

Verizon has cemented its position as the premier mobile network in the US. The company has backed up its premier status by its numbers as well as the level of customer satisfaction it has generated. The company's share price growth over the course of 2014 in particular has not been consistent. The company will have to streamline its operations in order to consistently boost investor confidence. In an effort to streamline operations and shift its business model towards mobile, the company has sold non-core wireline assets worth $10 billion. The company has thus initiated rigorous efforts towards enhancing operational efficiency. The cash generated from divestments can be invested in cost cutting measures for the mobile segment which is the company's principal growth driver. The divestments will also generate cash for dividend payouts and share repurchases. Verizon does have the tools to drive investor confidence and push share prices upwards. The company might not be an attractive prospect for short term investors but long term investors should consider buying into and holding on to the company's stock.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.