Verizon or Vodafone?
David is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Verizon Wireless is arguably one of the worlds most attractive telecom properties at the moment. The unit is growing revenue around 8% year over year with ARPU up 3.6%. Secondly, Verizon Wireless derives all of its sales from the United States, which is attractive to investors looking for perceived safety from a slowdown or collapse in other parts of the world. Moreover, the company has the best EBITDA margins of all US carriers (46.3% compared to 41.6% for ATT, 28.7% for T-Mobil, and 14.6% for Sprint). Verizon Wireless is attractive on nearly every metric; however, because the company is a joint venture between Verizon (NYSE: VZ) and Vodafone (NASDAQ: VOD), there is no way to invest solely the Verizon Wireless. One must choose Verizon or Vodafone.
Verizon provides the best exposure to the wireless business. Verizon owns 55% of Verizon Wireless and derives two-thirds of its revenue and three-fourths of its EBITDA from the unit. On the other hand, Vodafone's 45% stake in Verizon Wireless accounts for one third of its revenue and one third of its EBITDA. Because Verizon Wireless contributes more than twice to Verizon's business what it contributes to Vodafone, Verizon is clearly the best way to play Verizon Wireless. However, it is not clear that Verizon is currently a better investment than Vodafone. To determine this, we must examine each company excluding Verizon Wireless.
Verizon's wireline business provides the last third of revenue. This business is in decline as more users ditch their landlines, relying solely on wireless phones instead. Thus, it is no surprise that revenues for the segment were down 2% year over year and EBITDA was down 6.2%. Moreover, the business is far less attractive than the wireless business, offering a 22.6% EBITDA margin. However, all is not bad. The segment is entirely US based, which appeals to nervous investors. And, the FiOS and Enterprise Strategic Services sub-segments had strong revenue growth of 17.9% and 11.6% year over year, respectively.
The remaining two-thirds of Vodafone's business is largely wireless operations throughout Europe, Africa, India, and Australia. The group posted overall revenue growth of 1.5% year over year, with particularly strong growth in Ghana, Turkey, India, and South Africa (29.2%, 25.1%, 19.5%, and 7.1%, respectively). Furthermore, while the group's EBITDA margin is not as high as Verizon Wireless's, a 31.2% EBITDA margin is not particularly bad. However, all is not well in Vodafone's business. The group is exposed to the turmoil in southern Europe and saw year over year declines in revenues in Greece, Spain, Portugal, and Italy (9.6%, 9.4%, 4.8%, and 3.4%, respectively). Also, the company's growth in emerging markets comes with added political risk (namely, India's attempt to retroactively tax the group).
Although one might like to invest soley on the information above, one cannot properly compare Verizon's and Vodafone's businesses without knowing how expensive each is. By assuming EV/EBITDA multiples for the Verizon Wireless business, the EV/EBITDA multiples of Verizon's and Vodafone's remaining businesses can be calculated. A conservative 7x multiple, implies a multiple of 7.8x for Verizon's wireline business and 3.9x for Vodafone's business. Richer valuations for the wireless business, imply lower multiples for both Verizon's wireline business and Vodafone's ex-US businesses, with Verizon's wireline multiple falling more quickly than Vodafone's. Verizon's wireline business becomes cheaper than Vodafone (Verizon just under 2x and Vodafone just over 2x) when the wireless business is valued at just under 11x.
Based on the above, it seems investors have a choice between a predictable, declining business or a highly uncertain, slow-growing business. With where sentiment stands today, it is not surprising that investors are willing to pay up for safety. Consequentially, if you are deeply concerned with near to medium-term uncertainties, Verizon is the stock for you. However, over the next several years, I believe Vodafone provides a better growth opportunity (if Europe firms up, revenue growth will exceed the current 1.5%) at a better value (in all realistic valuations of Verizon Wireless, Vodafone's superior business was valued less than Verizon's wireline business). Thus, I would encourage investors with a long horizon to look more closely at Vodafone.
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