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Analyst Blog

On May 9, 2014, we issued an updated research report on Verizon Communications Inc. (VZ - Analyst Report). Thecompany reported mixed first-quarter 2014 results wherein the top line surpassed the Zacks Consensus Estimate while the bottom line lagged the same. Currently, the Zacks Consensus Estimate for Verizon’s second quarter earnings is pegged at 92 cents, representing an annualized growth rate of 25.93%.

Verizon Communications has a strong foothold in the wireless market and expects growth from higher penetration of devices and increasing market penetration of 4G LTE services. On Jan 6, 2014, Verizon Wireless announced an agreement to transfer 700 MHz A Block spectrum licenses to T-Mobile US, Inc. (TMUS - Snapshot Report) for $2.4 billion and spectrum licenses in the AWS and PCS bands. The bands will help in expanding its 4G LTE network coverage. The transaction is expected to close by the first half of 2014.

Further, in Apr 2014, the company forged an agreement with Cincinnati Bell Inc. for purchasing spectrum licenses worth $194 million. The deal is expected to close by the second half of this year and would incorporate licenses in key markets like Greater Cincinnati and Dayton, Ohio areas of northern Kentucky and southeastern Indiana. In these areas, Cincinnati Bell reportedly offered GSM-based 2G, 3G and HSPA+ services through 460 cell sites.

Verizon is riding high on increased smartphone sales and the introduction of devices is likely to boost data revenues going forward. During the fourth quarter of 2013, the company’s smartphone penetration increased to 72% on 7.6 million smartphone activations and several device launches to lure customers to 4G LTE, which accounts for over 73% of the total data traffic.

The company ended the quarter with 61.3 million smartphone activations, of which 64% were 4G. With approximately 22 million 3G smartphones and over 23 million basic phones, the company expects a further expansion in its 4G smartphone base in 2014. In addition, Verizon is focusing on enhancing its postpaid tablet base in 2014, which currently stands at 4.3 million.

Despite Verizon’s significant prospects in the wireless arena, we remain wary of weakness in the enterprise customer premises equipment (CPE) business. Further, slower strategic services revenue growth also remains a deterrent for the company. Future dividend growth is also likely to be moderate due to the need to clear debt after the acquisition of Vodafone's 45% ownership in Verizon Wireless.

The company’s wireline division is struggling with persistent losses in access lines owing to competitive pressure from voice-over-Internet protocol (VoIP) service providers and aggressive triple-play (voice, data, video) offerings by cable companies. These are weighing on the company’s revenues and margins. In order to make itself profitable, Verizon is making significant investments and is streamlining its cost structure. It remains unclear if and when a reasonable return can be achieved from such investments.

Further, wireline revenue trends would remain challenging over the next couple of quarters due to the company’s initiatives to improve profitability. The product rationalization and process simplification initiatives would dilute profits in the short term.

Verizon currently has a Zacks Rank #3 (Hold).

Other Stocks

Better-ranked stocks in this sector include Level 3 Communications, Inc. (LVLT - Snapshot Report) and Talktalk Telecom . Both have a Zacks Rank #1 (Strong Buy).

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