Dueling Fools
A Duel Over Verizon
The Bull Argument
By
Chris Rugaber (TMF Chris)
If you're a Verizon Communications (NYSE: VZ) customer, you might not be the biggest fan of the company, which, like most Baby Bells, has a generally spotty customer service record. (By the way, those of us who are telecom know-it-alls refer to the Baby Bells as Regional Bell Operating Companies (RBOCs), or Incumbent Local Exchange Carriers (ILECs), instead. You can learn all about these industry terms and a whole lot more in our InDepth: Telecom & Networking area).
Nevertheless, if you're an investor in the company (I am not), you've got a lot less to complain about, given the recent performance of Verizon's shares. Among telecom carriers, the RBOCs have been a port of relative calm amidst a storm that has taken down companies from the big long-distance carriers such as AT&T (NYSE: T) and WorldCom (Nasdaq: WCOM) to newer carriers like Williams Communications Group (NYSE: WCG) and Global Crossing (NYSE: GX). While those companies were slammed last year, Verizon has returned about 9% -- dividends included -- since its merger became official in July.
In large part, this is because Verizon, along with fellow ILECs SBC Communications (NYSE: SBC) and BellSouth (NYSE: BLS), is accomplishing what some of the larger carriers have literally fallen apart trying to do: they are successfully bundling a variety of communications services, and maneuvering to become one-stop communications shops. In addition, while SBC and BellSouth have stumbled a bit recently, Verizon took pains in mid-December to confirm its earnings guidance for 2001 and 2002. The company expects earnings per share (EPS) growth of 8% this year, to $3.13-$3.17, and 12% EPS growth next year.
Clearly, given these numbers, you are not going to get rampaging share-price appreciation from owning a chunk of Verizon. However, you are likely to get a relatively stable investment, which is no small thing in this tumultuous market.
As a result, investors interested in benefiting from the ongoing explosion in telecommunications services -- local and long-distance voice, data, high-speed Internet, video (Verizon resells direct satellite TV from Hughes Electronics (NYSE: GMH), and wireless -- should definitely check out this company.
What does Verizon do?
Verizon is the largest local phone company in the United States, with 63 million local access lines in its Northeastern and Mid-Atlantic service area. The company also has regulatory approval to offer long-distance service in New York state, and signed up 1.2 million New Yorkers by the third quarter of this year, including about 16% of the residential long-distance market. Verizon is also applying to offer long distance in several other New England states.
In addition, the company is growing its data services revenue at a 30% per quarter clip, and has done so for 11 consecutive quarters. These services include virtual private networks, dedicated high-speed data lines, and other business services that remain in high demand.
On the consumer side, Verizon is (finally) ramping up its DSL service, and easily hit its year-2000 target of 500,000 customers. (DSL, or Digital Subscriber Line, enables high-speed Internet access over regular telephone lines). As of the third quarter, more than 1,770 of the company's local switching facilities, or central offices, were DSL-equipped, and nearly 60% of its local loops were DSL-qualified.
Of course, there have been plenty of complaints about Verizon's DSL customer service. The company claimed in its third-quarter conference call that it is improving DSL service and provisioning, and is adding 3,500 customers a day, which it expects to increase by the second half of this year. Either way, while bears have long pointed to complaints about DSL service as a problem for the RBOCs, there is little sign of it having an impact on the bottom line. In fact, DSL overall saw greater percentage growth than cable Internet in 2000.
Finally, the company owns a 55% stake in the leading U.S. wireless service provider, Verizon Wireless, in partnership with global wireless monster Vodafone Group (NYSE: VOD). Verizon Wireless recently announced that it added 1.2 million new subscribers in the fourth quarter of this year, bringing its customer totals to 27.5 million, 16% greater than in 1999.
Verizon Wireless' dominance is also clear in the ongoing wireless spectrum auctions being conducted by the FCC, in which the company ponied up almost half the total bids by last Friday. Some of the company's competitors, including Nextel Communications (Nasdaq: NXTL) and surrogates for Sprint (NYSE: FON), have dropped out, unable to keep up with the bidding.
A cash machine
Don't think for a moment, however, that Verizon Wireless can't handle the expense. Verizon itself is a veritable cash machine. All its different lines of business mentioned above produced approximately $47 billion in revenue in the first nine months of 2000, and more than $58 billion in all of 1999. Plenty of that fell to the bottom line, with net income (excluding some one-time items) reaching $5.9 billion for the first three quarters of last year.
More importantly, the company is throwing off a lot of cash: a look at its third-quarter cash flow statement, included in the company's 10-Q filing, shows that Verizon raked in more than $12 billion in cash from operating activities in the first nine months of last year. This healthy cash flow enables the company to make hefty investments to upgrade its network and other capital expenditures. These investments reached $11.8 billion by the third quarter of last year.
In other words, Verizon has the business plan and the cash to carry it forward, through both calm and rough waters. It is executing on its goals of becoming a diversified communications provider, and is planning to expand nationally (and internationally). Why not consider investing in such a steady company?
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