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Verizon Retains Neutral Tag

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We reaffirm our Neutral recommendation on Verizon Communications Inc. (VZ - Free Report) . The company’s fourth-quarter 2013 top and bottom-line results surpassed the Zacks Consensus Estimate and improved year over year. Currently, the Zacks Consensus Estimate for the first quarter 2014 earnings is pegged at 83 cents, representing 21.69% growth year over year.          

Why Neutral?

Verizon is currently focusing on the buyout of the remaining 45% stake of Verizon Wireless, which is held by Vodafone Group. This deal is touted to be one of the biggest in the telecom space after Vodafone’s acquisition of Germany’s Mannesmann AG in 2000 (for approximately $142 billion) and Time Warner Inc.’s merger with AOL (for $124 billion) in 2001.

We believe the complete takeover of its wireless business would translate into greater synergies for Verizon, which already holds a significant place in the U.S. wireless market. Verizon Wireless, with operating income over $25 billion, is not only a key driver of Verizon Communications’ earnings, but also provides an edge over close rivals like AT&T Inc. (T - Free Report) and Sprint Corp. (S - Free Report) .

Verizon has a strong foothold in the wireless business and continues to capture additional market share via robust deployment of the 4G Long Term Evolution (LTE) network. This leads to improved operating and capital efficiency. The company is leading the industry in terms of 4G deployment.

On Jan 6, Verizon Wireless announced its agreements to transfer 700 MHz A Block spectrum licenses to T-Mobile USA (TMUS - Free Report) in exchange for cash ($2.4 billion) and spectrum licenses in the AWS and PCS bands which it will use to add capacity to its 4G LTE network. The transaction expected to close in the first half of 2014. As of Dec 31, 2013, it covered 500 markets and more than 305 million people.

We also appreciate various strategic initiatives that the company has taken over the last couple of months. The company’s new data plan — Share Everything — accounts for almost 46% of its post-paid account, representing 16.2 million users. Going forward, this plan is expected to boost the company’s device adoption and usage resulting in a higher number of devices and revenue per account.

The company’s wireline division is struggling with persistent losses in access lines as a result of competitive pressure from voice-over-Internet protocol (VoIP) service providers and aggressive triple-play (voice, data, video) offerings by the cable companies. These are weighing on the company’s revenues and margins.

In order to make it 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 actions to improve profitability. The product rationalization and process simplification initiatives would dilute profits in the short term.

In addition, the development of new technologies, such as Internet Protocol-based services, including VoIP and super high-speed broadband and video, could be subject to conflicting regulations between the FCC and various state and local authorities, which could significantly increase the cost of implementing and introducing new services based on this technology.

As a result, we remain cautious on the company’s near-term performance.

Currently, Verizon retains a Zacks Rank #3 (Hold).

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