Value Line is regarded as the best independent research available. More than just recommendations, Value Line provides the rationale behind its picks for greater understanding.
- Don D., California
Dow 30 Profile: Verizon
History Of The Company
Dow Jones Industrial Average component Verizon (VZ - Free Verizon Stock Report) is a global broadband and telecommunications company formed in 1983 as Bell Atlantic during the breakup of AT&T (T -Free AT&T Stock Report) into seven Baby Bells. Bell Atlantic originally operated in New Jersey, Pennsylvania, Delaware, Maryland, West Virginia, Virginia, and Washington D.C. In 1996, the company joined with NYNEX; and then merged with GTE, creating Verizon Communications Inc. on June 30, 2000. At the time, the $52 billion transaction was among the largest mergers in U.S. history.
Before the last merger was completed, Bell Atlantic and UK-based Vodafone AirTouch Plc (now known Vodafone Group Plc (VOD)) inked an agreement to create a new wireless business with a national footprint, a single brand, and a common digital technology. This joint venture received regulatory approval within six months and began operating as Verizon Wireless on April 4, 2000. Verizon is the majority owner, with a 55% equity stake in the business. Subsequently, in February of 2005, Verizon agreed to acquire MCI, formerly known as WorldCom. A year later, MCI was incorporated into Verizon and became known as Verizon Business.
A Company In Transition
Over the last few years, Verizon has focused its attention on its wireless, FiOS (fiber-based wireline) and global IP (Internet Protocol) networks; these are new growth businesses that are aiding net customer additions and retention. What’s more, these businesses offer a needed counterbalance to the lackluster demand reported by the company’s traditional voice and business services. Indeed, at the end of 2011, wireline revenues accounted for 37% of total revenues. Seven years ago, that number was at 53%. However, wireless revenues have gone from about 39% of 2004 volume to 60% six years later.
In order to focus on its more profitable ventures, the company has sold off a number of non-core assets, including a spin-off of Verizon’s U.S. print and Internet yellow pages directories subsidiary to its stockholders and the sale of its interest in its Caribbean and Latin American operations to America Movil (AMX). Additionally, the company liquidated its local wireline operations that serve residential and small-business customers in mostly rural areas in 14 states to Frontier Communications (FTR) for $8.6 billion. Proceeds from these sales were earmarked for the faster-growing VZ divisions.
Separately, Verizon Wireless has been active on the acquisition trail, so as to boost its market share in this lucrative business. In late 2007, the company acquired Rural Cellular Corp. for roughly $2.67 billion in cash and assumed debt. Subsequently, VZ Wireless completed the purchase of Alltel for about $5.9 billion, thereby making it the largest wireless player in the United States, and more recently, the company acquired certain operating assets of Centennial Communications Corp. of Louisiana and Mississippi from AT&T for $235 million.
It should come as no surprise that although there are synergies to be had, acquisitions can and are putting pressure on Verizon’s margins. In order to provide a counterbalance, management began a restructuring program aimed at growth acceleration and productivity enhancement in late 2009. As a result, VZ merged its two wireline business groups, Verizon Telecom and Verizon Business, so as to step up operational performance by increasing speed to market, upping its growth, and paring costs.
Finally, over the last couple of years, many of the players in this industry have felt the effects of increased competitive pressures, a significant shift away from their traditional wireline business toward wireless, and the effects of the recent recession in the United States. Yet, the general outlook for telecommunications stocks seems to be improving, now that the U.S. economy is slowly rebounding. An improved economic situation typically leads to businesses spending more on capital equipment and hopefully boosting hiring, which would certainly increase demand for telecom services.
Potential For Significant Wireless Growth
In January of last year, Verizon Wireless announced that it had joined forces with Apple (AAPL) to offer the iPhone 4 to the 94 million VZ Wireless subscribers beginning on February 10, 2011, with pre-ordering for existing customers beginning a week earlier. Up until that point, the iPhone was available exclusively at AT&T, which has certainly helped boost that company’s top and bottom lines since its introduction in July of 2008.
And although the response to the Verizon iPhone has been quite strong, it is important to note that the company’ s bottom line continues to feel the effects of the capital layouts necessary to drive iPhone subscriber growth. Indeed, subsidization of the phone is rather pricey.
Another potential growth driver for Verizon Wireless is the adoption of smartphones and tablets that run on its 4G Long Term Evolution (LTE) network. LTE can support 5-12 Mbps download speeds, which compares favorably to current 3G speeds range from 0.6-1.4 Mbps. The increased speed allows users to quickly load websites, stream HD movies and live TV shows without buffering, video chat, download songs and upload photos to social networking sites in mere seconds, play online games with friends, and quickly download business presentations and conduct work in the cloud, wherever they so choose.
Finally, increased smartphone penetration typically leads to an uptick in average monthly service revenue per user (ARPU), which helps boost the top line. However, more smartphone users requires more bandwidth. As a result, in early December of last year, Verizon agreed to acquire 20MHz of AWS spectrum covering 259 million POPs for $3.6 billion from Spectrum Co. The deal escalates VZ’s spectrum position to 111MHz in the top 100 markets versus AT&T at 100 MHz now, and it stipulates that the seller must agree to resell Verizon’s mobile service to their own customers. This acquisition ought to alleviate a potentail capacity crunch, as exponential data usage growth drives wireless economies.
Head in the Clouds
One of the newer entrants to the IT lexicon is cloud computing, which enables businesses to deliver applications, store data, or do computations (among over services) via the infrastructure of an external provider, i.e. a network of computers, instead of using internal resources. In the past, companies had to purchase computers for each employee, as well as buy individual software, software licenses, and servers to handle the networking aspect of connecting the individual computers.
However, when applications and content are in the cloud, they can be accessed through the Internet, making installation of software unnecessary. In addition, companies that employ cloud conputing reap the rewards of lower captial expenditures and a reduction in the physical space required to support their own technology infrastructure by using the resources of cloud computing providers who already possess large data centers with powerful servers.
Given its potential for growth—cloud computing is currently being utilized, or will be within the near future, by roughly 50% of all organizatoins—it comes as no surprise that Verizon has focused on building out its global cloud strategy over the last few years. VZ delivers integrated IT and communications solutions via its high-IQ global IP and mobility networks to enable businesses to securely access information, share content, and communicte.
Most recently, in April of last year, Verizon closed on the acquisition of Terremark Worldwide, Inc., a global provider of managed IT infrastructure and cloud services. The deal steps up VZ’s “everything-as-a-service” cloud strategy by delivering a powerful portfolio of highly secure, scalable on-demand solutions to business and government customers globally through a unified enterprise IT platform and unique business cloud offerings.
Subsequently, in August of 2011, Verizon completed the acquisition of CloudSwitch, an innovative provider of cloud software technology, in a transaction that ought to simplify VZ’s move to the enterprise cloud and help boost industry adoption. Verizon is in the midst of merging CloudSwitch with its Terremark subsidiary, which ought to further accelerate VZ’s global cloud strategy by enhancing its hybrid cloud and cloud-to-cloud capabilities.
An Attractive Hold
All told, we think that blue chip Verizon shares are well suited for conservative accounts, given the company’s excellent finances and attractive dividend yield. And more-cautious investors are bound to be drawn to the stock’s low beta and 1 (Highest) Safety rank.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned