Verizon Communications Inc. (VZ) is set to announce its fourth-quarter 2014 financial numbers before the opening bell on Jan 22.
Last quarter, the company delivered a negative 3.3% earnings surprise. However, the company’s earnings surpassed the Zacks Consensus Estimate in two of the last four quarters, with an average negative surprise of 1.0%. Let’s see how things are shaping up for this announcement.
Factors at Play
The fourth quarter has been a tough one for telecom service providers as competition has intensified to a great extent. In an effort to expand customer base, telecom operators are increasingly spending on promotions and are also coming up with lucrative discount offers. These strategies are likely to impact the wireless segment EBITDA and EBITDA service margin in the final quarter of 2014.
Increased churn, lower margins, and persistent erosion in access lines due to stiff competition from VoIP service providers and cable companies are likely to mar Verizon’s fourth-quarter numbers. Verizon’s average-revenue-per-account (ARPA) is also expected to decline in the quarter.
In Dec 2014, the leading U.S. wireless carrier had stated that its fourth-quarter earnings would be hurt by higher promotional expenses and price cuts. Meanwhile, despite increasing churn the company’s high value customer base is getting stronger.
On the positive side, Verizon expects to witness robust wireless customer growth. Also, demand for 4G tablets and smartphones on its “More Everything” shared data plan has been pretty strong in the fourth quarter. Verizon further stated that the company will likely see EBITDA margin growth in the wireline segment for full-year 2014 and record capital spending of nearly $17 billion. The company also believes that wireless margin for the first-quarter of 2015 will return to its past levels.
Earnings Whispers
Our proven model does not conclusively show that Verizon Communications is likely to beat the Zacks Consensus Estimate this quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1, 2 or 3 for this to happen. Unfortunately, this is not the case here as elaborated below.
Zacks ESP: Earnings ESP, which represents the difference between the Most Accurate estimate and the Zacks Consensus Estimate, stands at -4.11%. This is because the Most Accurate estimate is pegged at 70 cents while the Zacks Consensus Estimate is higher at 73 cents.
Zacks Rank: Verizon has a Zacks Rank #3 (Hold) which increases the predictive power of ESP; but when combined with a -4.11% ESP, it makes surprise prediction difficult.
We caution against stocks with a Zacks Ranks #4 and 5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing a negative estimate revision momentum.
Stocks to Consider
Here are some other companies to consider as our model shows these have the right combination of elements to post an earnings beat this quarter.
Vonage Holdings Corporation (VG) with an earnings ESP of +50.0% and a Zacks Rank #1 (Strong Buy).
Sprint Corp.(S) with an earnings ESP of +13.04% and a Zacks Rank #3.
Level 3 Communications, Inc. (LVLT) with an earnings ESP of +6.06% and a Zacks Rank #3.
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