This Telecom's Wireless Business Will Drive Growth

Anindya is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Research analysts at Barclays Capital upped their target price on shares of Verizon (NYSE: VZ), the largest wireless carrier in North America, from $45.00 to $48.00. The firm currently has an “equal weight” rating on the stock. Verizon announced its financial results on Tuesday, January 22. The company reported $0.38 earnings per share for the quarter, missing the analysts’ consensus estimate of $0.52 by $0.14. The company had revenue of $30.05 billion for the quarter, compared to the consensus estimate of $29.83 billion. This follows a strong performance in its newer, non-legacy lines of business, specifically Verizon Wireless and its FiOS TV and broadband services.

A number of other analysts have also recently weighed in on Verizon. Analysts at UBS AG upgraded shares of Verizon from a “hold” rating to a “buy” rating. Analysts at RBC Capital reiterated a “sector perform” rating on shares of Verizon with a $50.00 price target on the stock. The company has a consensus rating of “overweight” and an average target price of $47.11. Verizon’s compelling fundamentals have led the analysts upgrading the company’s shares.

Verizon’s Compelling Fundamentals

Verizon has an attractive fundamental outlook based on increasingly favorable growth prospects. The following points should be considered while analyzing the future growth of the company:

Expanding Subscriber Base: Verizon continues to increase its subscriber base and ARPA (average revenue per account) followed by lower churn rates and better cost control. Retail postpaid ARPA grew 6.6% over fourth-quarter 2011, to $146.80 per month. As customers continue to add multiple devices to accounts following the introduction of the Share Everything Plan in June, Verizon Wireless now reports ARPA instead of ARPU (average revenue per user) since customers can share data among multiple devices.

Improved Competitive Position: The rollout of 4G services along with the new devices, as well as iPhone will provide huge potential for future growth. The company says that almost 50% of its all data traffic is on its 4G LTE services, covering more than 260 million Americans. Verizon also says that it now has a total of 21.6 million LTE-enabled devices on its network, a rise of 23.3% on last year. It sold 7.3 million of those in the last quarter. Devices include tablets and smartphones but also other hardware like network dongles. Further, the company’s expansion into cloud computing business through Terremark and CloudSwitch will boost its competitive position against its major rivals, AT&T (NYSE: T) and Sprint Nextel (NYSE: S).

Improved Product Cycle: Verizon has already launched many smartphone devices with more to be launched in the upcoming years. These will help to increase its market share as well as retain customers. Smartphones overall are driving a lot of Verizon Wireless business today with about 58% of all handset sales in the quarter were of smartphones, the carrier noted, up from 44% in the quarter last year.

Verizon Offers America’s Largest 4G LTE Network

Mobile devices like tablets and smartphones are quickly becoming a technological staple of the modern family. While smartphone penetration in the U.S. is over 50%, tablet penetration is on the fast track as well. Within a two-year period, almost one fifth of all U.S. homes will become tablet owners, according to Nielsen’s most recent Cross Platform Report. With Verizon offering America's largest 4G LTE network, this will result in huge revenue growth for the company.

Verizon offers a 4G-LTE coverage in over 475 markets covering nearly 80% of the U.S. population. AT&T has expanded its own 4G-LTE coverage but is lagging far behind Verizon. AT&T's total 4G-LTE market coverage is about 135 -- or very roughly 30% of what Verizon is offering. Sprint claims it'll be introducing 4G-LTE coverage to over 100 new markets in the coming months. Currently, Sprint trails its two largest competitors with nearly 50 markets serviced.

Verizon's Relative Valuation Among Peers

Verizon’s revenue per share is growing by 26.20% q-o-q, versus AT&T’s 6.58% and Sprint Nextel’s negative 10.99%. 

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VZ Revenue Per Share Quarterly Data by YCharts

Verizon’s ROIC (return on invested capital) is in-line with that of AT&T but better than Sprint’s negative return. In terms of EV / EBITDA Verizon is the most attractive in the lot. It has an EV / EBITDA of 5.215, versus AT&T’s 8.235 and Sprint’s 6.754.

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VZ Return on Invested Capital Data by YCharts

The Bottom Line

Verizon will post an average EPS of $2.80 for the current fiscal year, analysts predict. Given an attractive fundamental outlook, I expect the share price of the company to appreciate nearly 20% from the current levels over the medium-term. 

Anindya7 has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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