Verizon Guides Better Margins, Stock Trading Lower – Bidness Etc
Today marks Verizon Communications Inc.’s (VZ) first day of trading after it completed the acquisition of its remaining shares from Vodafone Group Plc (VOD). The company’s stock price is trading 0.78% lower as of 3:29 PM EST, after being down more than 1% earlier.
The company gave guidance on its performance expectations after completing a deal that enables the largest wireless company in the country to take full ownership of its wireless assets from Vodafone. The $130 billion deal is expected to have a one-time positive impact of about 10%, excluding non-operating adjustments, on the company’s earnings for the quarter as it gets access to full ownership of wireless cash flows.
In his statement to investors, Verizon’s Chairman and CEO, Lowell McAdam, stated: “We see a new phase of wireless growth and expanding opportunities as mobile networks become the platform for most of the world’s digital traffic. No company is in a better position to take advantage of these opportunities than the new Verizon.”
McAdam further voiced his confidence in the acquisition enhancing growth opportunities for the company as its ability to offer and deliver enhanced wireless and wireline products becomes more centralized.
Company Outlook
The company forecasts revenues will increase steadily at the same rate as last year. Revenues increased by 4.1% year-over-year (YoY) in 2013, and current expectations call for a 4% increase this year.
Verizon also expects margins to expand as the company looks to improve the efficiency of the wireless and wireline segments. Wireless EBITDA (earnings before interest, taxes, depreciation, and amortization) was $29.7 billion lastly, essentially unchanged over the previous year, whereas Wireline EBITDA rose by a little over $200 million to $8.7 billion during the same period.
Going forward, the company expects to keep investing in its network through the expansion of its infrastructure, along with strategically purchasing spectrum. Verizon expects capex to continue at about the same level of around $16.5-17 billion. Last year, it spent $16.6 billion.
The acquisition will result in higher taxes and interest expenses but it will save the company the special distribution it made to Vodafone, on top of the dividends on 2.9 billion shares.
Sell Side Expectations
Jeffries affirmed its price target of $55 for the stock last week, while Barclays did the same earlier today. The mean target for the company is around $59, while the high target is as much as $59 and $46 on the other end.
Revenues are expected to increase to $125 billion from $120.5 billion last year, and adjusted earnings are expected to rise by a dollar to $3.84 per share.
Verizon’s Financials
The stock is currently trading at a price-to-sales multiple of 1.12x, lower than the industry’s average of 1.35x. The EV/EBITDA ratio for the current year is also slightly lower than the industry’s, at 6.4x for the former compared to 6.6x for the latter.
This year, Verizon stock is down 4.2% while the S&P 500 index is up half a percent. At the end of last year, its stock value appreciated 11% while the S&P 500 was up 26.4%. The index is currently trading at a forward multiple of 15.4 times its earnings, while Verizon’s stock price is 13.5 times the company’s expected earnings.
Conclusion
The acquisition of the remaining stake will benefit the company by improving the cash flows that the business segment generates. Revenues for the segment last year were $81 billion, more than twice its wireline business revenues. The revenues were also 6.8% higher YoY, whereas wireline revenues fell.
The acquisition will not create any integration or synergistic hurdles for the company, which can instead capitalize on opportunities quicker as decision making becomes more centralized. Bidness Etc remains bullish on the stock, with favorable valuations along with the upside from increasing cash flows.
The company has also been in the news recently due to its quite public spat with Netflix Inc. (NFLX) over charging content providers for data streaming done by their customers. Netflix negotiated one such deal with Comcast Corporation (CMSCA), which could be a sign of things to come. We are watching the events closely as the story develops – Verizon could quite possibly see a new revenue stream in the near future.
What do you think is the best play in the Wireless Telecom Industry?
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Verizon Guides Better Margins, Stock Trading Lower – Bidness Etc
