On May 22, we maintained our Neutral recommendation on Verizon Communications Inc. (VZ), owing to its growth opportunities within the telecom sector, strong subscriber additions and expansion of the business line. However, the company faces certain headwinds that will likely hamper the upside movement of the stock. The largest wireless carrier in the North America holds a Zacks Rank #3 (Hold).
Why Maintained?
We believe that Verizon is favorably positioned to display a high level of operating efficiency supported by a favorable revenue mix and investments in key business areas. The company’s robust grip in the wireless segment along with focus on improving the performance of the wireline unit will enable it to register impressive revenue and earnings in the coming quarters.
The company’s fast deployment of the 4G Long Term Evolution (LTE) network plus the launch of attractive data plans are expected to aid its growth momentum. As of Apr 18, 2013, it covered 491 markets and more than 287 million people.
Verizon is also concentrating on acquiring more spectrum licenses in order to support its data services. In this regard, the company received approval from the Federal Communications Commission and entered into spectrum deals with AT&T Inc. (T), T-Mobile USA Inc. and Cricket License Company. Additional spectrum holdings will double Verizon’s capacity as well as enable services at a much higher speed, thereby driving data revenues and boosting its competitive position.
Apart from these, revised pricing plans, strength in the FiOS business segment, lucrative collaborations and healthy financial position will work in favor of the New York headquartered company.
Despite the positives, we prefer to stay on the sidelines owing to risk factors including persistent erosion in access lines, uncertain returns from investments, iPhone subsidies, and intense competition from cable companies and other alternative service providers.
For the second and third quarters of 2013, the Zacks Consensus Estimate for earnings are 73 cents and 74 cents per share, respectively. This reflects respective year-over-year growth of 13.7% and 15.7%.
Other Stocks
Foreign telecom firms that are performing impressively are Brazilian big-shot Telefonica Brasil, S.A. (VIV) and Netherlands-based VimpelCom Ltd. (VIP). Both the stocks carry Zacks Rank #2 (Buy).
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