A cheap forward multiple of around 13x and a dividend yield of 4.2% along with a dominance in the burgeoning 4G-LTE markets. Yes, I am talking about Verizon (VZ), the leader in wireless network space has yet again delivered on the expectations of the Street by reporting a robust quarter. Among other things, the sturdy second-quarter results clearly depicts its ability to deliver strong customer growth along with equally strong financial performance. Let us analyse if these positive financial metrics coupled with the opportunities in the wireless market make Verizon a credible buy.
A strong quarter
In the second quarter of 2014, Verizon’s topline grew by 5.7% to $31.5 billion from the year ago period on which it earned an EPS of 91 cents after excluding a non-operational pre-tax gain. The operating income margin also increased 240 basis points to 24.4% from the year ago period. One of the significant highlights of the call was a phenomenal increase of 1.4 million net retail connections in the quarter leading to a jump of 5.9% in service revenues. The retail service revenues increased 5.3% on the back of increased smartphone penetration. As per data, Verizon activated 8.3M smartphones in Q2 2014 up 10.2% year-over-year. Verizon Wireless' smartphone penetration is 75%, up from 64% last year.
Booming wireless business is a great sign
One of the big things that has benefitted Verizon is its strategy of converting its customers from low-end phones to high end smartphones. Consider this, the network giant exited the quarter with 63.5M subscribers and 69% of those were 4G. Besides this, the post-paid subscriber growth reflects a dramatic increase of 160% over the last quarter and 50% over the year ago period. This percentage jump can be compared to Verizon’s nearest competitor and second largest US carrier AT&T’s 30% increase in the subscriber base. It is important to understand that Verizon made a highly strategic move in the month of February when it renamed its “Share Everything” data plans “More Everything” and also increased the data allocation to its subscribers.
Under the abovementioned plan, the company attempted to reduce the overall cost of subscribers by increasing the data allocation. As a result, approximately 55% of all post-paid accounts on Verizon’s network were using these plans by the end of Q2 2014 as compared to 50% in Q1. In nutshell, Verizon benefitted from offering valuable subscription plans to the subscribers in a couple of ways. Firstly, it helped gain new customers from other networks including that of AT&T as they got higher data allocation at manageable prices. Also, the addition/conversion of mobile devices encouraged many of the subscribers to shift to higher data tiers and as a result, Verizon gained a proportionately higher share of revenue from existing subscribers.
Wireline: Struggling but not a cause for worry.
While wireless business of the company has been gaining traction for a while, the wireline business has been under pressure for quite some time. One of the reasons behind a sluggish wireline business has been the tough competition from already existing players like AT&T and Sprint. Moreover, the market is largely saturated providing little or no scope of reasonable growth. However, this quarter fared better for the overall wireline business owing to a sturdy performance by the consumer business segment. The Consumer business, which provides broadband and video services (including the Fiber-optic based FiOS), reported an increase of 5.3% in sales over the prior year quarter to about $4.5 billion. This was driven by double-digit revenue growth in FiOS driven by strong customer additions, innovative pricing actions as well as growing adoption of its recently introduced high-speed Quantum service. In my opinion, investors should not be really worries by the slowdown in wireline business because the competitors are facing a similar situation and it is expected to continue for the foreseeable future.
Verizon is a leader in the wireless space and that is a big bonus point for investors. Also, it has the first-mover advantage in 4G-LTE markets due to which it can leverage the opportunities in this space. But more than anything, the dividend yield of 4.2% is what makes Verizon highly attractive. Additionally, the positive guidance reiterated by the management for fiscal 2014 provides icing on the cake for investors who are looking for a stable company with considerable and sustained growth.