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RBOC DATA EQUIPMENT INTERNET VOICE WIRELESS PAGING …. OPPORTUNITY. Verizon Communications. Screen Thief. Utilize Slide Master for consistent formatting. Ticker - VZ Sector - Telephone Industry - Telecom Large Cap Stock Shares Outstanding - 2.6991 billion

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verizon communications
RBOC

DATA

EQUIPMENT

INTERNET

VOICE

WIRELESS

PAGING

….

OPPORTUNITY

Verizon Communications

Screen Thief

Utilize Slide Master for consistent formatting

basic stock statistics
Ticker - VZ

Sector - Telephone

Industry - Telecom

Large Cap Stock

Shares Outstanding - 2.6991 billion

Market Cap - $140.353 billion

Dividend - $1.54

Yield - 3.0%

52 Week High - $65.19

52 Week Low - $40.38

Recent Price - $52.00

Return YTD - 4%

NYSE Traded

Beta - .68

Average Daily Volume - 4,930,000 shares

Internet - www.verizon.com

Basic Stock Statistics

Source: Zacks, Quicken

basic stock statistics cont
Institutional Ownership - 42.40%

Insider Ownership - .04%

Sales Growth - 32%

Earnings Growth - 10%

Dividend Growth - 1%

Consensus Analyst Rating Strong Buy / Buy

EPS

1998 $1.86

1999 $2.65

2000 $3.11

2001 (e) $3.12

2002 (e) $3.51

P/E

Current 16.7

5 Yr. Avg. 17.8

Industry 20.0

S&P 23.8

Basic Stock Statistics Cont.

Valueline, Multex,

Zacks, Quicken

Zacks, Microsoft Money

Microsoft Money

Microsoft Money

Microsoft Money

Source: Zacks, Quicken

verizon competitors
Verizon Competitors
  • SBC Communications
  • BellSouth Communications
  • Qwest Communications
  • McLeod USA
  • Broadwing Incorporated

Source: Quicken

Screen Thief

services
Services
  • Business
    • Data services, business phone lines, Internet access, long distance, payphones, telecommunications equipment, enhanced calling services
  • Wireless
    • Wireless service plans, wireless phones (cellular phones), wireless data services and phone accessories
  • Government
    • Integrated network solutions for the federal government, including business phone lines, Internet access, data services, long distance, payphones, enhanced calling services, telecommunications equipment
  • Home & Family
    • Residential phone lines, long distance, Internet access, enhanced calling services, service packages, phones & accessories, video service
  • Wholesale
    • Verizon offers a comprehensive range of products and services for long distance providers, wireless carriers, Internet service providers, local service providers (resellers, ILECs, CLECs, and DLECs), and pay phone providers.
    • Source: Company website or 10-K
industry chart 5 years
Industry Chart - 5 Years

Source: Big Charts, use screen thief

industry analysis
Industry Analysis
  • Industry Review:
    • These stocks tracked markedly lower in 2000 after reaching record highs earlier in the year. The reasons given for this huge drop included:
      • Accelerating competition
      • Rising capital budgets
      • Declining free cash flow
      • Falling revenue and earnings estimates.
    • Especially hard-hit were the long-distance players (T and WCOM) and some of the smaller companies, especially in wholesale fiber-optics (XO).
    • Source: ValueLine or 10-K
industry analysis8
Industry Analysis
  • Long Distance:
    • Long distance companies have increasingly come under fire as their chief revenue producer becomes seen as a commodity, at the same time they are seeing more competition from Regional Bell Operating Companies (RBOCs), and less demand as consumers substitute wireless and Internet alternatives for communication.
    • These firms are trying to recover by splitting off their slow growth offerings and trying to get the market to unlock the value they feel is hidden in some of their growth products.
      • WCOM plans to break off its long-distance entity under the MCI moniker and have it pushed as an income producing stock, while it puts its high growth Internet, wireless, data, and international operations under the growth stock Worldcom.
      • AT&T plans to similar things by breaking apart its Consumer (income, no growth), Business (Growth and Income), and Wireless (Growth) businesses
  • Source: ValueLine or 10-K
industry analysis9
Industry Analysis
  • Baby Bells (RBOCs)
    • Followed the traditional Long Distance operators by reducing near-term performance expectations, although their situation appears to be much brighter than their counterparts.
    • These firms recently spun off their wireless operations in an attempt to get the issues IPO’d in order to unlock that avenue to raise additional capital (a necessity in this industry.)
    • Poor market conditions for telecom stocks have reduced the ability for both Verizon Wireless (Verizon) and Cingular (BellSouth) to IPO and have delayed some expansion projects.
    • These firms are also spending heavily to expand DSL service and bring fiber-optic lines closer to customers. This has benefited many small Telecoms like McLeod USA.
  • Source: ValueLine or 10-K
verizon 1 year chart
Verizon 1 Year Chart

Source: Big Charts, using screen thief

verizon 5 year chart
Verizon 5 Year Chart

Source: Big Charts, using screen thief

verizon business description
Verizon Business Description
  • Verizon Communications, formed by the merger of GTE and Bell Atlantic, is one of the world’s leading providers of high-growth communications services. Verizon companies are the largest provider of wireline and wireless communications in the United States. Verizon is also the world’s largest provider of print and online directory information.
    • Source: Zacks, Yahoo Finance/Profile, Multex
business background
Business Background
  • Largest U.S. Wireline provider
    • 63 million access lines and 101 million voice grade equivalents
    • In 67 of the top 100 markets
  • Largest U.S. Wireless provider
    • 26 million customers and 4 million paging customers
    • In 97 of top 100 markets
  • International Operations in 40 countries with 7 million customers.

Screen Thief

Source: Company website

good company news
Good Company News

Screen Thief

Screen Thief

  • Growth Abroad
    • Verizon is working on fusing together a global network that is aimed at lucrative corporate clients
    • Ever since the telecom deregulation act, the company has been expanding its reach out from the eastern U.S., and it plans to accomplish this expansion over the networks of several independent carriers that it owns a stake in like Flag Telecom and Metromedia Fiber Network.
    • Most of the push will be broadening the company’s reach in Asia, Europe, and Latin America. Verizon wants to be able to carry customer’s data and voice calls over their networks from inception to their termination internationally.
    • Source: CBS Marketwatch <http://www2.marketwatch.com/news/yhoo/story...
good company news15
Good Company News
  • Growth Abroad
    • The primary reason why Verizon is so adamant on keeping the information on their networks the whole way is because right now they have to hand off international traffic to established global carriers (EGC) who receive a fee for terminating those calls.
    • By cutting out the middle men, Verizon could keep those fees for themselves, which allows them to boost their own profits at the expense of rivals. These savings are expected to add up to $300 million over the next 5 years.
    • This move also allows Verizon to target more multinational customers, unlock their network’s true value, and diversify their customer base.
    • Source: CBS Marketwatch <http://www2.marketwatch.com/news/yhoo/story...
good company news16

Screen Thief

Good Company News

Screen Thief

Screen Thief

  • Growth Abroad
    • Verizon has as good a shot at the international market as anyone because the global market is already crowded with large carriers like AT&T, Worldcom, and British Telecom, but few are positioned to dominate, leaving the door wide open for entry.
    • This is especially good for a fast rising challenger like Verizon, who currently is only able to offer long-distance or data services to companies in New York or in areas not part of its original 13 state RBOC area.
      • They areexpected to win regulatory approval to sell long-distance in Mass., Conn., NJ, Penn., and RI later this year, as the company is able to prove to regulators that its original RBOC market is open to competitors.
      • Source: CBS Marketwatch <http://www2.marketwatch.com/news/yhoo/story...
good company news17

Screen Thief

Good Company News
  • Wireless Auction
    • Verizon Wireless (the company’s joint venture with Vodafone Group) ended up being the big winner at the recent FCC auction for wireless spectrum.
    • The company ended up shelling out $8.78 billion for 113 licenses.
    • The company plans on using the newly acquired spectrum for its current business without having to wait to deploy 3G networks and the costs associated with them.
    • These licenses are more of padding for the company’s existing spectrum, rather than a fulfilling of a dire need. This will allow them to grow their current business and have room for capacity expansion that should stoke revenue.
    • Source: Thestreet.com <http://thestreet.com/_yahoo/tech/telecom/1279266.html
good company news18

Screen Thief

Good Company News
  • Wireless Auction
    • Maybe even more beneficial for the company than winning the spectrum for themselves is that they kept it out of the hands of the #2 company in the industry, Cingular Wireless.
    • Cingular only has about 10 megahertz of spectrum in New York City, and needs at a minimum another 10 megahertz to provide full service in the area.
      • This benefits Verizon because NY is the company’s top market, and it costs half as much for VZ to provide service in the area as Cingular because they already have the towers and cell sites in place, whereas Cingular doesn’t.
      • Source: Thestreet.com <http://thestreet.com/_yahoo/tech/telecom/1279266.html
good company news19

Screen Thief

Good Company News

Avoid press releases from the company, most of these contain trivial information. Focus on information from articles

  • Strong DSL and Long Distance Growth
    • Verizon had 540,000 DSL customers at the end of the year 2000 which is up from the 350,000 that they had in September of that year, and even more than the 500,000 that was the company’s goal.
    • The company also upped their earnings estimates for 2001 on news that they would no longer acquire troubled DSL provider NorthPoint Communications (another poor CLEC.)
    • The company won 20% of the NY long-distance market in its first year of being able to compete there, and expects to see similar growth when it enters into other areas that it was previously barred from competing in, in the Northeast.
    • Source: Reuters <http://biz.yahoo.com/rf/010128/n2689576_2.html
bad company news

Screen Thief

Bad Company News

Avoid press releases from the company, most of these contain trivial information. Focus on information from articles

  • Brain Tumor Lawsuit
    • Verizon Wireless could face up to 10 compensation claims (which may amount up to billions of dollars in damage) from brain tumor victims in the U.S.
    • This stems from a lawsuit that charges all wireless providers with covering up that radiation from mobile phones cause cancer.
    • Leading the lawsuits is Peter Angelos, owner of the Baltimore Orioles and the lawyer who recently helped win $4.2 billion from the tobacco industry in Maryland. His involvement should lead to the largest study ever done on the affects of mobile phone radiation, and could lead to future monetary problems for all firms in the industry.
    • Source: Thestreet.com <http://www.thestreet.com/_yahoo/tech/telecom/1231544.html
bad company news21

Screen Thief

Bad Company News
  • Problems with Verizon Wireless IPO
    • The IPO of the joint venture with Vodafone has been delayed numerous times as investment bankers for the group continue to wait for improved market conditions before floating the issue.
    • The issue has been delayed since October numerous times as a poor market for telecom issues hurt the potential of a successful IPO.
    • If it continues to get put off, the need for increased capital funding from its parents may detract from their ability to invest in other ventures.
    • Source: Mourningstar <http://biz.yahoo.com/ms/010201/4216.html
bad company news22

Screen Thief

Bad Company News
  • Poor Service Plaguing DSL Operations
    • A lawsuit filed in January charged that Verizon misled consumers about the quality and availability of its high-speed, always on DSL service, and failed to tell consumers of service and installation problems.
    • A example was given of a Massachusetts man who signed on with Verizon, but gave up after several false starts, one of which involved the company giving him the wrong equipment, another involving a billing problem, and the consistent cry of poor service. After giving up, he attempted to use Earthlink’s service, but a Verizon phone line was needed and when he requested its use, he was told it was not available.
    • Source: Reuters <http://biz.yahoo.com/rf/010128/n2689576_2.html
bad company news23
Bad Company News
  • Poor Service Plaguing DSL Operations
    • The lawsuit seeks damages and an order that Verizon not be able to sign up any more DSL customers until the problems are resolved.
    • This could result in DSL customers being sent to competing formats such as cable access for their high-speed Internet needs, and slow the phenomenal growth the company has been experiencing in that market.
    • Verizon is also facing another hearing in New York about whether the company is providing fair access to its lines for competing DSL providers.
    • Source: Reuters <http://biz.yahoo.com/rf/010128/n2689576_2.html
bad company news24
Bad Company News
  • Job Cuts
    • Verizon plans to cut approximately 10,000 jobs this year as a part of a continuing effort to eliminate positions duplicated by last year’s purchase of GTE and to meet the cost cutting goals set in the merger.
    • Most these are expected to be done through not filling vacancies, cutting overtime, and using contractors, although layoffs are possible.
    • The company has 260,000 employees, so they feel that normal attrition should take care of at least 60% of their desired goal.
    • Source: Associated Press <http://biz.yahoo.com/apf/010208/verizon_jo_2.html
market multiples
Market Multiples

Copy and Paste Excel File

Source: Quicken, Screen Thief

revenue growth
Revenue Growth

Copy and Paste Excel File

Source: Quicken, Screen Thief

net income growth
Net Income Growth

Copy and Paste Excel File

Source: Quicken, Screen Thief

management performance
Management Performance

Copy and Paste Excel File

Source: Quicken, Screen Thief

debt ratios
Debt Ratios

Copy and Paste Excel File

Source: Quicken, Screen Thief

final subsidiary notes
Final Subsidiary Notes
  • Incendiary Issues
    • Data and Wireless services continue to grow, although both businesses saw growth decelerate in the most recent quarter.
    • The company’s operations continue to generate healthy cash flow, but margins are declining as capital spending for services like DSL accelerates.
    • Verizon is fairly risky in macro terms because of all of the uncertainty in the telecom market and how its pieces will all fit together, but they are the best of the RBOCs based on cash flow multiples and is currently the best way for us to gain exposure to this industry.

Kevin’s brilliant mind

intrinsic value calculations p e valuation model
Intrinsic Value CalculationsP/E Valuation Model
  • Price/Earnings Per Share Method:
    • Justified P/E * EPS1
    • BEST CASE = 20.0 * $3.20 = $60.60
    • WORST CASE = 17.0 * $3.10 = $52.70
    • MOST LIKELY = 19.0 * $3.15 = $59.85
    • CURRENT PRICE = $53.15

Justified P/E is based on an assessment of the average ten year P/E and expectations of companies future. Justified EPS is based on consensus estimates from different sources such as ValueLine, Zacks, Multex, and Quicken.

intrinsic value calculations p s valuation model
Intrinsic Value CalculationsP/S Valuation Model
  • Price/Sales Per Share Method:
    • Justified P/S * SPS1
    • BEST CASE = 2.8 * $24.75 = $69.30
    • WORST CASE = 2.2 * $24.25 = $53.35
    • MOST LIKELY = 2.4 * $24.70 = $59.28
    • CURRENT PRICE = $53.15

Often, ValuLine is one of the best sources for historic P/S figures. This information can also be found on Microsoft Money’s site under the ten year summary of financial ratios.

intrinsic value calculations p cf valuation model
Intrinsic Value CalculationsP/CF Valuation Model
  • Price/Cash Flow Per Share Method:
    • Justified P/CFPS * CFPS1
    • BEST CASE = 8.1 * $7.70 = $62.37
    • WORST CASE = 7.5 * $7.50 = $56.25
    • MOST LIKELY = 7.9 * $7.60 = $60.04
    • CURRENT PRICE = $53.15

Again, ValueLine and Microsoft Money tend to be the two best sources for historical ratios.

recommendation
Recommendation
  • BUY VZ from $50-55
  • I really like VZ as I do NXTL, but for different reasons. VZ allows us to get the diversification into DSL, long-distance, and the local markets, while still keep some growth businesses like wireless and data, whereas I like NXTL as a niche player. I think they complement each other well and would both be good additions to our portfolio.

Kevin’s opinion. Serious investors are advised to sell short.