On May 9, 2014, we issued an updated research report on
Verizon Communications Inc.
). Thecompany reported mixed first-quarter 2014 results wherein the
top line surpassed the Zacks Consensus Estimate while the bottom
line lagged the same. Currently, the Zacks Consensus Estimate for
Verizon's second quarter earnings is pegged at 92 cents,
representing an annualized growth rate of 25.93%.
Verizon Communications has a strong foothold in the wireless
market and expects growth from higher penetration of devices and
increasing market penetration of 4G LTE services. On Jan 6, 2014,
Verizon Wireless announced an agreement to transfer 700 MHz A Block
spectrum licenses to
T-Mobile US, Inc.
) for $2.4 billion and spectrum licenses in the AWS and PCS bands.
The bands will help in expanding its 4G LTE network coverage. The
transaction is expected to close by the first half of 2014.
Further, in Apr 2014, the company forged an agreement with
Cincinnati Bell Inc. for purchasing spectrum licenses worth $194
million. The deal is expected to close by the second half of this
year and would incorporate licenses in key markets like Greater
Cincinnati and Dayton, Ohio areas of northern Kentucky and
southeastern Indiana. In these areas, Cincinnati Bell reportedly
offered GSM-based 2G, 3G and HSPA+ services through 460 cell
Verizon is riding high on increased smartphone sales and the
introduction of devices is likely to boost data revenues going
forward. During the fourth quarter of 2013, the company's
smartphone penetration increased to 72% on 7.6 million smartphone
activations and several device launches to lure customers to 4G
LTE, which accounts for over 73% of the total data traffic.
The company ended the quarter with 61.3 million smartphone
activations, of which 64% were 4G. With approximately 22 million 3G
smartphones and over 23 million basic phones, the company expects a
further expansion in its 4G smartphone base in 2014. In addition,
Verizon is focusing on enhancing its postpaid tablet base in 2014,
which currently stands at 4.3 million.
Despite Verizon's significant prospects in the wireless arena,
we remain wary of weakness in the enterprise customer premises
equipment (CPE) business. Further, slower strategic services
revenue growth also remains a deterrent for the company. Future
dividend growth is also likely to be moderate due to the need to
clear debt after the acquisition of Vodafone's 45% ownership in
The company's wireline division is struggling with persistent
losses in access lines owing to competitive pressure from
voice-over-Internet protocol (VoIP) service providers and
aggressive triple-play (voice, data, video) offerings by cable
companies. These are weighing on the company's revenues and
margins. In order to make itself 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 initiatives to
improve profitability. The product rationalization and process
simplification initiatives would dilute profits in the short
Verizon currently has a Zacks Rank #3 (Hold).
Better-ranked stocks in this sector include
Level 3 Communications, Inc.
). Both have a Zacks Rank #1 (Strong Buy).
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