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Verizon Communications – Sell-side’s Pick in Telecom Universe

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By: Sam Quest
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Verizon Communications Inc. (VZ) led the DOW yesterday, rising almost 2.5%. The stock ended the day higher by $1.15 to close at $47.50 on the news of a vote of confidence from Wall Street.

Morgan Stanley resumed its coverage on the company giving it a thumbs-up following a slew of other sell-side analysts who have done the same over the last 10 days. It seems as if all of a sudden the wireless giant is getting all the love, however it is likely that the impact of the acquisition of Vodafone’s 45% share in the company’s wireless business is just now being digested by investment professionals.

Our analysis on the company back in November 2013 gave a price range for the stock between $46 and $57. At that time the stock was trading at $49.62. While most of the big names and recently the two Morgans (Morgan Stanley and JPMorgan Chase) have just jumped on the band wagon, we have always been and still remain bullish on the company.

Jeffries and Barclays both affirmed their price target for the company’s stock at $55 last week. Jeffries gave their approval on the back of a statement from Verizon CEO Lowell McAdam calling for steady growth and improving margins. Barclays changed their position to “Overweight” the same day. Since then Bank of America has raised its rating on the stock from a “Neutral” to a “Buy” while JPMorgan Chase put it on their “focus list” with an “Overweight” rating and a target price of $57.

Here is why Morgan Stanley is the latest of the sell-side analysts to raise Verizon’s outlook for 2014, pegging its target price at $52.

Acquisition of Vodafone share

Verizon finalized its purchase of Vodafone’s 45% stake in Verizon Wireless out of Europe. The acquisition gives the largest wireless provider in the US, complete control of its wireless assets, the most profitable and fastest growing segment of its business.

Wireless revenues are the largest share of the company’s overall sales and provide steady, stable and growing cash flows for the company throughout the year. Wireless accounts for over 65% of the company’s revenues and cash flows.

The acquisition will also allow the company to better take advantage of growth opportunities in the wireless segment as decision-making becomes more centralized and geographically aligned with the company’s operations.

Wireless dominance

Verizon dominates the US market in terms of post-paid wireless customers. The company has 102.8 million total subscribers out of which 96.7 million are post-paid customers. Even with the intense competition being posed by it’s all too familiar rival AT&T Inc. (T) and the much smaller but growing force of T-Mobile US (TMUS), Verizon continues to lead the market in terms of net subscriber additions. Morgan Stanley analyst Simon Flannery noted that Verizon still manages to take 40% of total postpaid subscribers.

The company also has the strongest brand loyalty based on the churn rate in the industry, and leads the telecoms in terms of having the lowest turnover in its subscriber base. This allows Verizon to maintain a steady stream of revenues, counting on its strong subscriber base that continues to stay with the company even with increasing options from competitors.

Network Superiority

By most measures Verizon has the largest 4th Generation Long Term Evolution (4G LTE) network in the country. The company was the leader in terms of developing its infrastructure around new technology at its inception and has continued to allocate most of its capex on network upgrades.

As an early adopter of new technology the company was able to gain market share due to its network superiority and expanded coverage. It was also able to do this back then, and it still continues to expand in rural areas where competition is less intense. That move has paid off for Verizon as it still dominates with the largest spectrum holding in the lower band frequency which is used to provide service in rural settings.

*FCC.Gov (Dec 2012)

Favorable Valuations

Verizon is currently trading at a price-to-earnings multiple of 13.6 times. This is at a 13.7% discount to the S&P 500 which is trading at a forward multiple of 15.75 times to its 2014 earnings. Verizon’s dividend yield is 4.5% compared to the S&P 500 which is at roughly 2%.

Verizon is also trading at a 48% discount to the industry as a whole, which is priced at 26.4 times its earnings. That figure is a little skewed since T-Mobile itself is priced at over 70 times its earnings.

Conclusion

Verizon’s stock presents a great risk/reward opportunity. The company is a market leader in its industry. In most metrics it leads the competition and maintains its dominance. Verizon is expected to continue to grow at a steady 4-5% in 2014, while its margins are expected to expand.

It has brand awareness and loyalty. Its network by most independent measures is the best in the country and it is in a position to take advantage of growth opportunities when they present themselves.

It is not surprising to see most of the large investment houses to come maintain a confident outlook on Verizon’s prospects. We at Bidness Etc. were bullish on the stock back then and continue to feel the same way now.

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