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The Wireless Giant

March 26, 2014 | About:

As the largest wireless carrier in the U.S., Verizon Comunications Inc. (VZ) has an impressive geographical coverage of 95% of the U.S., serving 25% of its population. VZ’s reputation regarding networks without interruptions aids a strong economic moat and its customers' loyalty. Based on high cash flow levels, unmatched investment projects and comparative advantages to AT&T Communications Inc. (T), VZ offers the best wireless service in the U.S.

In addition to these operational advantages, VZ finally achieved full control over its future with the acquisition of 45% of Verizon Wireless, from its previous owner Vodafone Group PLC (VODPD). This purchase increased VZ’s total debt, but also gave management more power over the firm, which is expected to open new expansion projects.

One of these promising projects can be found in the smartphone segment: By adding 8.8 million customers, VZ has increased its penetration to 70%. Other highly profitable projects include international expansions and further diversification of revenue streams. In addition to Private IP capabilities, expansion will continue into new countries in the Middle East, Asia and Africa. Lastly, VZ has recently diversified its services by closing a deal with Hyundai Motor Co. (HYMTF), which is set to provide wireless services for their vehicles.

Some Challenges Ahead

As the U.S. telecom industry seems increasingly saturated, carriers are under great pressure to manage data and find new markets without disturbing free cash levels. Fixed-line services have turned into a battle arena for VZ, since other wireless and cable companies have been stealing household customers. Also, the firm has been subsidizing iPhones relying on 4G LTE heavily, as it is expected to become the standard for next generation mobile devices. This might result in a downward spiral, since minor carriers may delay their deployments or simply change their next-generation standard selection.

Lastly, we may believe that VZ’s acquisition from Vodafone entails great pressure to produce regular debt payments.

Fundamental Trends and Expected Growth

The firm ended 2013 with a gross debt of $89.6 billion, almost doubling that of the previous year. Nevertheless, VZ finished 2013 with a net debt of $35.5 billion compared to $44 billion from 2012. Hence, a downward trend is evident.

VZ’s operational margin of 11.4% compared to the 11.21% industry average, grants this firm the capability to operate its new projects quite freely and meet its debt obligations. Its EBITDA rate stands at -3.3% and although it’s lower than the industry’s median, it is still 71% higher than all global telecom companies and even higher than AT&T's, its principal competitor.

Guru Trades and Dividend Trends

VZ represents an interesting option for a solid investment, as observed in guru trends. The fourth quarter of 2013 saw a new buy of 1.33 million shares by Andreas Halvorsen (Trades, Portfolio), and Jim Simons’ addition of 11.38% to his hedge fund’s portfolio. Currently, neither new buyers, such as Ray Dalio (Trades, Portfolio) and Joel Greenblatt (Trades, Portfolio), nor VZ’s major bull James Barrow (Trades, Portfolio) are leaving the firm.

Verizon is committed to shareholder’s interests, offering a dividend yield of 4.39%, higher than the industry average of 3.77%. In addition, VZ has increased its dividend by 2.9%, marking the seventh increase in consecutive years. I agree with gurus like James Barrow (Trades, Portfolio), who progressively adds shares to his holding, which now exceed 22.88 million shares. VZ is surely a noteworthy long-term investment for those seeking to adventure into the wireless communication sector.

Disclosure: Vanina Egea holds no position in any stocks mentioned.

About the author:

Vanina Egea
A fundamental analyst at Lone Tree Analytics

Visit Vanina Egea's Website


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