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The Nation's Largest Wireless Carrier

August 13, 2014 | About:
ovenerio

ovenerio

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In this article, let's take a look at Verizon Communications Inc. (VZ), a $202.45 billion market cap company, which is a provider of communications, information and entertainment products and services to consumers, businesses and governmental agencies with a presence in more than 150 countries around the world.

Good business

Verizon Wireless is a good business and the biggest wireless carrier in U.S. It has been the most consistent of the industry's major players. Over the past decade, it has been investing in its networks and taking the hard work of imposing the brand in the market with a consistent message.

Verizon Wireless has grown more than its share. It added 539,000 retail post-paid subscribers in the first quarter of 2014, taking a dominant share of the market, together with AT&T (T).

Verizon Wireless

The only competitor that could reach Verizon´s scale is AT&T, but we believe Verizon Wireless has competitive advantages relative to its rival, like a better position that includes two largely nationwide blocks and a superior network reputation.

With more than 95% of the U.S. population, the company adds new subscribers every year and, through its joint venture with Vodafone Group, had 100 million wireless customers. The company continues gaining market share though the evolution of 4G Long Term Evolution (LTE) network and smartphone sales.

Higher competition

T-Mobile US (TMUS) and Sprint (S) are making efforts to reach a higher quota of the market. T-Mobile has become a strong competitor while Sprint is also focusing to compete more aggressively. However, neither of them have the profitability; the margins or the generation of cash flow as Verizon.

Further, the competition with cable companies like Cablevision and Comcast to capture Internet access, phone and television customers is increasing. The company invested heavily in its networks, which has driven revenue growth, although the returns were not so high.

Payment history

Since 1984, Verizon has a dividend policy showing its commitment to return cash to investors in the form of dividends as it generates healthy cash flow on a regular basis. The current dividend yield is 4.5% which is very good to protect purchasing power, and is above the industry average as well as S&P 500 average dividend yields.

Revenues, margins and profitability

Looking at profitability, revenue growth by 5.69% led earnings per share increase in the most recent quarter compared to the same quarter a year ago by 29.5% ($1.01 vs $0.78). The net income increased by 87.6% when compared to the same quarter one year prior.

Chairman and CEO Lowell McAdam said, “Verizon’s second-quarter results continue to demonstrate our ability to deliver strong customer growth, with equally strong financial performance, in a dynamic and competitive environment. We have great momentum heading into the second half of the year. We remain focused on profitable growth and on meaningful network investments that provide our customers with the best, and with a continuously improving, overall experience.”

During the past fiscal year, it increased its bottom line by earning $4.00 versus $0.31 in the prior year. For the next year, Wall Street is expecting a contraction of 11.3% in earnings ($3.55 versus $4.00).

Finally, let´s compare the best measure of performance for a firm's management: the return on equity. The ROE is useful for comparing the profitability of a company to that of other firms in the same industry.

Ticker

Company

ROE (%)

VZ

Verizon

29.6

T

AT&T

20.06

S

Spint

-61.04

TMUS

T-Mobile

0.25

 

Industry Median

11.96

The company has a current ROE of 29.6% which is higher than the one exhibited by its peers and the industry median. In general, analysts consider ROE ratios in the 15-20% range as representing attractive levels for investment. It is very important to understand this metric before investing, and it is important to look at the trend in ROE over time.

1407936172963.png

Relative Valuation

In terms of valuation, the stock sells at a trailing P/E of 10.3x, trading at a discount compared to an average of 25.6x for the industry. To use another metric, its price-to-book ratio of 13.5x indicates a premium versus the industry average of 3.81x while the price-to-sales ratio of 1.32x is below the industry average of 1.61x.

As we can see in the next chart, the stock price has an upward trend in the five-year period.

1407936063701.png

Final comment

As outlined in the article, the wireless rivalry has raised the level of competition. However, Verizon has interesting growth drivers, a good relative valuation and a leading position in a challenging industry landscape.

Moreover, the stock's relative valuation and the return on equity that exceeds the industry average make me feel bullish on this stock.

Hedge fund gurus like Steven Romick (Trades, Portfolio), Robert Olstein (Trades, Portfolio) and James Barrow (Trades, Portfolio) added this stock to their portfolios in the second quarter of 2014, as well as Manning & Napier Advisors, Inc. and Pioneer Investments (Trades, Portfolio).

Disclosure: Omar Venerio holds no position in any stocks mentioned

About the author:

ovenerio
We provide independent fundamental research and hedge fund and insider trading focused investigation.

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