A Cash Rich Telecom for Gains This Quarter
Maxwell is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Not even Hurricane Sandy seems to have been able to affect Verizon's (NYSE: VZ) steady revenue, sales, and share value growth. Even though the so-called Frankenstorm flooded the telecom giant's Manhattan headquarters and disrupted service, Verizon has kept chugging along.
Verizon's revenue seems to be going up a little after taking a fall early in the year. Verizon's revenue growth is better than AT&T's (NYSE: T), which saw a slight fall in year to year quarterly revenue growth. Verizon hasn't experienced as much revenue growth as the acquisition-happy CenturyLink (NYSE: CTL). CenturyLink's quarterly revenue grew at a rate of 4.68%. This is slightly lower than Sprint (NYSE: S), which saw its revenue grow by 5.16% in the past year.
These figures indicate that the telecom sector is still growing despite the widespread switch to prepaid phones. Verizon saw an increase in sales growth of 4% but a fall in income growth of 5.7%. The question facing value investors though is: How much cash do telecoms have coming in? Does the cash flow justify the risks that this sector is facing from intense competition, the economic downturn, and the growing popularity of prepaid wireless?
Verizon is Generating Cash
Verizon accumulated $33.03 billion in cash from operations in the fiscal year that ended on September 30, 2012. That was up from the same date in 2011, when Verizon generated $29.76 billion in cash from operations. Verizon's cash flow is increasing, although it is lower than AT&T, which earned $36.44 billion in cash from operations in the same period. Verizon has figured out how to make more cash in a tough sector. CenturyLink, on the other hand, only had $4.92 billion in cash from operations.
Verizon also had a free cash flow of $5.6 billion on September 30. That was slightly lower than AT&T's $6.6 billion. So Verizon does have one classic value attribute - a lot of cash. People are obviously paying their phone bills.
iPhone 5 Sales Driving Telecom Profits
The huge popularity of the iPhone 5 from Apple (NASDAQ: AAPL) is helping drive telecom profits, but AT&T seems to be the big winner in that duel. New reports indicate that AT&T was able to sell twice as many iPhones as Verizon did. That makes Verizon the second largest seller of iPhones and ahead of Sprint. Verizon sold 651,000 iPhone 5 units in the third quarter, while AT&T sold around 1.6 million.
Verizon is making inroads into the iPhone market, which it entered last year, but it has a lot of work to do to catch up with AT&T. Sprint is still number three in the iPhone wars despite the fact that customer surveys indicate its iPhone delivers better call clarity.
Verizon obviously needs to beef up its wireless efforts because revenues from wire delivered services were down in the third quarter. The wire line division reported that its revenues were down by 2.3%. Like other telecoms, Verizon is struggling to make up for lost income from wire-delivered services.
The bottom line is that Verizon faces risks, but it has figured out how to grow revenue in a changing market place. The company is increasingly relying on the wireless market, which generates a lot of cash in the form of prepaid plans. That cash can be equated to the float at an insurance company. That is money that both the customer and the company have access to.
Such float can be viewed as cash flow even though it cannot be viewed as revenue. The float from prepaid plans increases Verizon's value, even though it doesn't necessarily increase revenue. That is why Verizon is showing an income decrease and a sales increase at the same time. It is also why the company's revenue is going up right now.
This means we have to take a different view of telecom companies, such as Verizon and T-Mobile. Like insurers and some finance companies, they have a lot of cash even if they are not generating a lot of revenue.
Telecom companies like Verizon have become a classic value investment. They have a lot of cash even though they are not attracting the kind of hype that Apple and Google are. Verizon is definitely a value investment right now because of the cash it has on hand.
Drive Home With More Analysis
The stakes are high and the opportunity is huge after Apple’s introduction of the iPhone 5, so to help investors understand this Apple event, the Fool has released an exclusive update dedicated to the iPhone 5. By picking up a copy of this premium research report on Apple, you'll learn everything you need to know, and receive ongoing guidance as key news hits. Claim your copy today by clicking here now.
StockCroc1 has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple. Motley Fool newsletter services recommend Apple and AT&T.; 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.If you have questions about this post or the Fool’s blog network, click here for information.